By OSCAR MACKERETH
Two new investments were made in the quarter (Q1 2025), Dassault Systèmes and IDEXX Laboratories, which is detailed below.
IDEXX Laboratories is the leading global player in veterinary diagnostics and animal health technology, developing, manufacturing, and distributing products and services for pet healthcare as well as livestock, poultry, and water safety testing.
The company’s core Companion Animal Group segment (CAG) accounts for 91% of consolidated revenue in FY24) serves veterinary clinics through a range of goods and services, spanning in-clinical analysers, rapid test kits, reference laboratories and veterinary software. We view IDEXX’s position, selling primarily into veterinary clinics rather than directly to end consumers, as an attractive means to access to the companion animal market. Through transacting directly with veterinary professionals, the business enjoys numerous stable, recurring revenue streams which are less susceptible to short-term shifts in consumer sentiment. This structure provides unrestricted access to numerous structural growth trends, whilst buffering the business from the full volatility typically associated with consumer confidence cycles. We believe that current market attention has disproportionately focused on near-term cyclical factors, notably recent declines in veterinary clinic volumes, rather than IDEXX’s strong underlying fundamentals and sustainable long-term growth potential. Consequently, we view the present environment as an opportune time to build a position in the company.
Market Dynamics
Animal care has emerged as an enduring investment theme, underpinned by evolving demographic shifts and consumer behaviours. Younger generations, notably Millennials and Generation Z, are increasingly humanising their pets, regarding them as integral members of the family rather than ‘merely’ animals. This transformation is driving significant increases in household spending dedicated to pet welfare, with pet-related expenditures exhibiting resilience even amid broader economic fluctuations. As these cohorts prioritise premium healthcare services, they allocate higher budgets towards positive health outcomes for their pets. In the US for example, gross companion animal expenditure has grown at a ~9% CAGR between 2018 and 2024, with 47% of total spend in 2024 dedicated to vet care, supplies and OTC medicines[1]. Moreover, whilst the number of households adding pets has declined from 2020 due to a pull forward of demand during COVID, in 2024 34% (up from 28% in 2022) of surveyed individuals noted their intention to get a pet[2], with the results heavily skewed towards those aged 18-34.
Figure 1: American Pet Products Association , Cerno Capital
Within this sector diagnostics stands out as a compelling segment, benefiting directly from the increasing age of pets and the consequent rise in veterinary interventions. IDEXX Laboratories, the global leader in this niche, currently estimates its total addressable market to be US$45bn, up significantly from US$30bn in FY21. Only 15% of this opportunity is currently being adequately served. This growth trajectory reflects several intertwined factors: notably, the consistent rise in pet ownership, accelerated during the pandemic, coupled with an ageing pet population. Pet lifespans are demonstrably extending—IDEXX data reveals that between 2010 and 2023, the average lifespan for dogs and cats has increased by 15% and 12%, respectively[3]. This demographic shift inherently boosts demand for diagnostics, as older animals naturally require more frequent and sophisticated medical intervention. As such, whilst the US companion animal lifespan has only increased by ~13% since 2010, the lifetime diagnostic spend per animal has increased by 17%[4].
Figure 2: Idexx Laboratories
Further amplifying diagnostics’ attractiveness is the escalating complexity and cost of veterinary pharmaceuticals, fostering a meaningful transfer of value from pharmaceuticals toward diagnostic services. Rising drug costs incentivise stakeholders—veterinarians, pet owners, and insurance companies—to shift focus towards preventive medicine, aiming to detect health issues earlier and thus reduce long-term care expenses. This dynamic is leading to increased diagnostic utilisation per veterinary visit, establishing diagnostics not only as a clinical necessity but as a driver of clinic profitability.
Figure 3: Idexx Laboratories
Right to win
In our view, IDEXX’s primary right to win in this market is found in three core characteristics:
Ecosystem approach
Whilst IDEXX does compete with several other industry majors, such as Antech in reference laboratories, and Zoetis and Heska in point of care diagnostics, the company enjoys leading market share across both segments. This dual position grants the company synergistic benefits in the form of bundling and cross selling of point of care (POC) and reference lab offerings. Its reference labs handle complex cases requiring specialized testing, while its in-clinic instruments provide rapid diagnostic results for routine veterinary care. Through maintaining leading capabilities across both segments, IDEXX maintains a flexible approach to customer service by catering for all preference dynamics.
These core offerings are supported by ancillary services such as veterinary consulting, high-touch educational facilities, and practice management software, creating a one-stop solution with high customer stickiness. Once a clinic has IDEXX equipment installed, staff trained, and clinical data uploaded to their practice management systems, moving to a competitor’s platform would be costly both in terms of opportunity and fiscal outlay. The success of this ‘high-touch’ evidenced by growing customer reliance on IDEXX for multi-faceted relationships, with the number of US customers utilising multiple service growing to 57% in FY23 (up from 52% in FY21 and 33% in FY12).
Economies of Scale
The company operates the largest global network of veterinary reference laboratories, allowing the business to process diagnostic tests at volumes exceeding smaller, regional players, resulting in materially lower unit costs and higher operating efficiencies. By leveraging this scale, IDEXX is able to achieve predictably high and expanding margins whilst maintains faster turnaround times, driving 90%+ customer retention rates. This facilitates consistent investment in innovative diagnostic solutions and advanced software platforms, allowing for continued expansion of diagnostic menus, improving test accuracy and operational efficiency.
Figure 4: Cerno Capital, Bloomberg
Non-Zero Sum Model
Finally, IDEXX operates in a non-zero sum manner, whereby value is created rather than extracted from other industry participants. Veterinary practices utilising IDEXX’s advanced diagnostic ecosystem often experience tangible enhancements in business outcomes, with diagnostics becoming high-margin services that contribute meaningfully to practice revenues. IDEXX data evidences[5] practices deeply engaged with IDEXX’s ecosystem routinely experiencing above-market growth rates, driven by both improved patient outcomes and financial benefits from incremental diagnostic services. For pet owners, this translates into significantly enhanced care, with IDEXX’s diagnostics facilitating faster, more accurate diagnoses, resulting in healthier animals with potentially lower cumulative veterinary costs.
Shareholders similarly benefit from IDEXX’s integrative approach, as company profitability is aligned with the interests of veterinarians, pet owners, and pets themselves. IDEXX’s pricing power is predominantly driven by the value provided through ongoing innovation and diagnostic menu expansion. For example, since coming to market in 2008 the Catalyst chemistry analyser has undergone 12 ‘menu’ expansions, with each bringing new functionalities to existing machines. In 2023 alone, the catalyst installed base generated US$280mn from new menu functionalities[6]. Similarly, the upcoming Cancer Dx Screening test for canine lymphoma is priced at just US$15 per test, reducing costs relative to existing methods (US$200 to US$600). IDEXX plans to expand this innovative platform over the next three years to encompass the six most prevalent canine cancers, representing over half of all canine cancer cases whilst unlocking estimated incremental addressable market of US$ ~1.1 billion.
Outlook
In the wake of the pandemic pet boom, IDEXX has encountered near-term headwinds that have tempered growth. Notably, despite the growth in the number of companion animals, veterinary clinics have seen a decline in visit volumes post-COVID, creating a headwind to diagnostic volume growth. Management has described this as a ‘dislocation’ dynamic, with the number of pets being structurally underserved. Crucially, this decline does not appear to reflect waning pet owner interest in care, but rather a mixture of capacity constraints in the veterinary profession, as well as economic headwinds in the consumer. These challenges are at least partially linked, as clinics increase pricing as a result of lower capacity, resulting in higher economic burdens for consumers.
Despite these macro issues, the fundamental demand drivers for pet healthcare remain robust. The pet ownership increase during COVID was a pull forward in demand. However, these animals will inevitably require adequate care as they age and positively contribute to clinical volumes as they do so. During this downturn, IDEXX has continued to build upon its leadership, position through taking market share whilst improving its financial profile. Notably, even amid a two-year decline in veterinary visits, IDEXX has successfully expanded its installed base of diagnostic instruments by 21%, reflecting sustained clinic investment into its diagnostic ecosystem. Furthermore, rising diagnostic utilisation per veterinary visit during this period underscores both veterinarians’ increasing commitment to preventative care protocols and pet owners’ growing recognition of diagnostics as a source of value in maintaining pet health. Collectively, these factors position IDEXX with a stronger foundational platform, primed to capitalise significantly when veterinary practice volumes revert to their structural growth trajectory.
Consequentially, we view the current market conditions as an opportune moment to initiate a position in IDEXX Laboratories, as short-term preoccupations with cyclical headwinds overlook the company’s long-term fundamentals. Over the past two years, IDEXX’s intrinsic quality has, in our view, only improved, supported by several positive indicators.
Firstly, the ongoing strength and growth of its installed base demonstrates sustained demand from veterinary clinics.
Secondly, the increased quality of each veterinary visit, evidenced by rising diagnostic spend per interaction, highlights deeper customer engagement and higher perceived value from pet owners.
Thirdly, we believe the recent dislocation in veterinary visit frequency relative to pet ownership is likely a temporary phenomenon, rather than a structural decline.
Finally, IDEXX’s robust innovation pipeline, historically a significant driver of financial and operational performance, provides further confidence in its ability to continue generating long-term growth. As such, we consider the recent weakness in IDEXX’s share price as a compelling opportunity to establish a holding in a high-quality, global market leader benefiting from a substantial, expanding, and still significantly underpenetrated total addressable market.
The business’s numerous sustainable competitive moats, including scale advantages, integrated services, and technical leadership, position it attractively within the veterinary care ecosystem, offering differentiated exposure to an enduring secular growth theme.
Footnotes (IDEXX):
[1] American Pet Products Association
[2] Morgan Stanley Survey: https://www.morganstanley.com/ideas/pet-care-industry-outlook-2030#:~:text=%E2%80%9CAs%20Millennials%20become%20homeowners%2C%20delay,and%20services%2C%E2%80%9D%20says%20Gutman.
[3] Idexx Laboratories, 2024 Investor Day
[4] Idexx Laboratories, 2024 Investor Day
[5] Idexx Laboratories, Q2FY24
[6] Idexx Laboratories, 2024 investor day.
Text is taken from the Cerno Global Leaders Investment Report Q1 2025. For a full copy of the report, please contact [email protected].
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