Bet on Animal Health By Investing in Idexx Laboratories, Analysts Say

The animal health industry looks poised for growth, analysts say, and Idexx Laboratories (IDXX)  may benefit most.

Veterinarians are attempting to drive traffic to clinics in a myriad of ways, leaving analysts positive on the group despite declining visits in the second quarter.

While veterinary clinic visits declined in the second quarter of 2016 from the first quarter, they were still higher than they were the year before, according to a Credit Suisse report. And though growth in the number of visits is slowing, that doesn't bother analysts, as visits are still increasing. 

And the outlook is for the trend to continue. According to Credit Suisse analyst Erin Wilson, 84% of vets polled expect to see an increase in clinic patient traffic in the coming months.

As a result, Wilson reiterated enthusiasm on the stock, noting that she is encouraged by "broader optimism in diagnostic utilization trends from the vast majority of veterinarians."

A Canaccord Genuity report also noted that 54% of veterinarians surveyed use Idexx as its point of care chemistry analyzer, compared with 23% that use Abaxis (ABAX) and 8% that use Heska (HSKA) .

Wilson favors Idexx over the competition.

"We view competitor Abaxis' traction as disappointing, despite broader distribution support, lagging Idexx in innovation and bundling capabilities, and we are reaffirming our underperform view," Wilson wrote. And the analyst considers Heska largely a non-entity at this point.

To be sure, there are areas where Heska and Abaxis excel, including heartworm diagnostic testing. But that may set up either for an acquisition in the analyst's view.  

"There is some material traction for specified products from smaller diagnostics players with the opportunity to better compete with broader distribution support," Wilson wrote.

Meanwhile, Wilson expects the group as a whole to benefit as veterinarians use new tactics to draw clients, including prepaid wellness and insurance plans, though their uptake is still minimal at this point. 

According to the North American Pet Health Insurance Association, only 1.4 million of the 179 million North American pets are insured by their owners. But that provides more upside if such plans can be marketed more effectively.

Also, M&A activity is growing, which could likely point to interest in the companies as a whole.

On Oct. 5, for example, Eli Lilly & Co. (LLY) agreed to buy Boehringer Ingelheim's GmbH's Vetmedica Inc. in a deal worth $885 million. The acquisition included the company's U.S. feline, canine and rabies vaccines portfolio and the fully integrated manufacturing and research and development site in Iowa.

On Aug. 8 Danish diagnostics company Scandinavian Micro Biodevices wrapped up its sale to Zoetis Inc. (ZTS) for $80 million. And in September, Danaher Corp. (DHR) paid $4 billion for Cepheid Inc. (CPHD) , which put Heska and Abaxis into play as potential targets for takeover.

Idexx, which has a market cap of $9.98 billion, was trading at $111.41 per share Friday, up 0.6% from market's open.

Abaxis, which has a cap of $1.18 billion, was trading at $52.49 per share, up 0.4% from market's open.

Heska, which has a market cap of $336.18 million, was trading at $53.26 per share, down 0.3% from market's open.

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