Arman Kline:
The company had a wonderful 2014. It made a big decision to go to direct distribution. Historically, Idexx (NASDAQ:IDXX) distributed the consumables for its instruments and its rapid assay tests for companion animals through a network of distributors in the US. Overseas it was a little bit more direct. It made a decision to go direct here, and the reason it made that decision is that it felt as the market leader with a dominant market share introducing new technology, new products, it needed a sales force that could encourage the adoption of those products more than it needed the help of distributors to penetrate the market. We think that management made the right decision.
Earlier this year, you may have noticed in the first quarter, Idexx had a little bit of a hiccup as a result of that move to direct distribution. A competitor came out with a lower priced product and distributors picked it up because Idexx was no longer selling through them. The competitor was very aggressive, and, as the CEO of Idexx said, there is now a rapid assay price war going on in the industry. The business is still growing very nicely, but the stock was priced for perfection — last year it was trading for a high 30s multiple of forward earnings. Most of you have probably noticed we have sold down our position as a result of that valuation. We are still large shareholders. We still believe in the business. We think it is unique. We think it has a long runway. We think it will continue to dominate that space. We remain excited about the future there and believe in its direct distribution model. Do you want to add anything, Greg?
Greg Steinmetz:
Idexx is responsible for at least 75% if not more of all of the R&D spending in veterinary diagnostics. It can earn a nice return on that because this megatrend of the humanization of pets is showing no signs of stopping. People will spend anything on their animal if the veterinarian gives them a credible reason why they should. And it is a lot more than just rich people. It is a broad swath of pet owners. Idexx, to its credit, is a great believer in veterinary diagnostics. Management sees it as a very long-lived opportunity. It has really been paying off. Despite the issue with rapid assay this year, we are still going to get 10% organic growth. International is going gangbusters, and there the humanization of pets is just getting started. Even in China — where they are boiling Tibetan mastiffs, if you read the story in the Times two weeks ago — people are starting to treat animals more like humans. It is an opportunity that Idexx is going to benefit a great deal from.
From Ruane, Cunniff & Goldfarb Investor Day 2015 Transcript Part II - Sequoia Fund.
