Eurofins Food & Microbiology Lab Economics

Former VP at Eurofins

Why is this interview interesting?

  • Giles Martin owns the majority of the real-estate of Eurofins’ labs
  • Eurofins has a competitive advantage by having the densest microbiology network
  • Automating sample handling is easier in chemical than biology testing
  • Biology labs are losing employees to clinical labs that can afford to pay higher wages
  • Labour cost is 35% of lab cost structure and is up 10-15% in last 12 months
  • How Eurofins would manage a large account like Nestle across numerous tests

Eurofins Scientific

Why is this company interesting?

Eurofins is a French-listed, owner-operated lab testing company that operates in the food, agriculture, environmental, and pharmaceutical industries. The company was founded in 1987 and has compounded at 30% for over 34 years to become one of the highest performing European listed equities over the last 30 years.

Eurofins is run by the founder Gilles Martin who still owns 25% of the business. Martin has made over 400 acquisitions since 1997 and opened 180 new labs. The company owns ~800 labs that offer 200,000 microbiology, chemistry, and other types of specialized testing to large corporate QA divisions to ensure product quality meets regulatory standards and customer demands.

Eurofins benefits from high lab density that reduces the test turnaround time and the wide range of tests available create sticky relationships with customers. Over 70% of the revenue ex-COVID benefits come from food, pharma, cosmetic, and environmental verticals but the potential growth opportunity lies in more specialised clinical diagnostic testing.

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Executive Bio

Richard Higby

Former VP at Eurofins

Richard has 20 years in lab testing and is the Former VP of Microbiology at Eurofins Scientific having joined the company after the Covance acquisition. Richard was responsible for integrating Covance and Eurofins' US biology labs and managed the full P&L for 4 micro-labs post-acquisition. Prior to Eurofins, he ran Covance Biology and also spent 9 years running labs at Microbac.Read more

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Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Richard, can you provide a short introduction to your background in the lab testing space?

I left marketing with Ecolab in 2002 to lead a contract research lab. It's a bit novel; it was a risk to laboratories as the premier global provider of testing services to the global tobacco industry. We have labs in Richmond, VA, and Kingston Upon Thames in the UK, just outside London. I held that role for nine years or two years after the FDA gave responsibility for tobacco, which diminished the market for testing. I chose to leave and join Microbac Laboratories in 2011. At Microbac, I was the managing director of the largest of their labs in Wilson, NC. That laboratory, unique in Microbac's world, specialized in pharmaceutical testing, personal care products, microbiology, a little bit of food, and we started up a small tobacco testing section based on my experience. Microbac is a sole proprietorship, and the balance of the laboratory is focused on environmental testing, wastewater, drinking water, that kind of thing.

In 2015, I was recruited to Covance in Madison, WI, to lead their microbiology laboratories. It was a pretty good challenge for a chemist to step into that role. I did it successfully as a turnaround leader. The focus of Covance was primarily chemistry, and they had a poor understanding of how microbiology needed to operate. I successfully restructured the lab and the leadership and turned a piece of coal into a bit of a diamond gem for their Madison and Battle Creek operations. As I think you understand, in 2018, the food business at Covance was acquired by Eurofins. Then, my responsibility was to help integrate the microbiology labs into the larger Eurofins network. I was responsible for four laboratories and charged to start a fifth, all in the eastern US. My four labs comprised a bit under 50%, about 48% of the total EBITDA for the 14 micro-labs in the Eurofins network.

What attracted Eurofins to Covance’s food business?

Covance Food Solutions had existed for decades, starting with a University of Wisconsin extension program. I'm not quite sure of the sequence here, but Eurofins acquired Covance food solutions business after the acquisition by Labcorp, I believe in late 2013. It didn't really fit with the Labcorp key strategy, which is primarily in clinical diagnostic testing. It became a great pathway and opportunity for Eurofins to become the US's number one food testing organization.

Are there any synergies between clinical diagnostics and the food testing business?

Anecdotally, I was told that when Labcorp bought Covance, they didn't even know the food business existed. It was initially played as an extra gem in the crown of Labcorp, and Labcorp operates one of the largest logistical networks in the country to bring samples into their six central labs. They thought, here's an opportunity to integrate that logistical network and help move samples in the food business. The mismatch came in that clinical samples are picked up in predominantly urban areas, and food samples are picked up in rural areas, so the drivers and logistics in Labcorp didn't go where we needed them to go. It turned out to be a great concept, but it just didn't quite mesh.

Is that because you’re collecting samples in different areas? Clinical is more urban, but the corporate customers on the food side are typically plants in rural areas, not urban areas?

Correct. You can have a doctor's office or a dentist's office right next to your house, and you don't complain too much, but you put a meat slaughter plant next to your house, and it's a different environment. So they tend to be located outside.

But Eurofins are very well diversified across seemingly all verticals. They do have a diverse business; CRO business, and food and environmental. Are there any synergies within Eurofins?

Very few. Eurofins divides its operating units into less than $20 million revenue bite-sized pieces as separate legal entities. That pans out that that legal entity is typically headed up by a business unit leader. That's a corporate philosophy that comes from the top down. You don't end up with a lot of overlap between, say, a clinical diagnostic lab and a food microbiology lab. The pandemic did create an opportunity in that we saw a lot more attempts to bring synergy. In fact, in the Battle Creek, MI micro-lab, we established a Covid testing center, not for clinical samples, but for environmental samples. Swabs off doorknobs, nurse-call buttons and bedrails, to see if we could detect the SARS-CoV-2 virus in the environment.

For those $20 million legal entities, what does that typically look like? Is that three, four, or five labs, and you could have multiple entities within food and microbiology?

Keep in mind that's more of a guideline than it is an absolute rule. The microbiology laboratory space might comprise all the micro-labs as one legal entity, which is the case, and there are 14 to 16 of those today. Or it might comprise a single laboratory site like the Covance Madison site, which is up over $100 million. So there is variation in it, but you can't run it. Even the Madison site is broken up into sub-business units, so it gets the P&L management down to a lower level.

How much ownership do you get at Eurofins to manage your own P&L?

There is a great deal of latitude. Some of the fixed costs are hard to manage if you're operating in a facility with fixed rent; it's hard to vacate the facility. All of the facilities, or a majority of them, are owned by the CEO as a separate entity, a real estate holding company. It's not like you can give notice and move to another facility.

Is that common?

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Eurofins Food & Microbiology Lab Economics(February 24, 2022)

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