50% upside hidden in this lab testing powerhouse: Eurofins Scientific

Introduction

In an era where health scares can go global in days (hello COVID-19) and where consumers demand ever-more transparency about the food they eat, the drugs they take, and the environment they live in, the question is: which companies stand to thrive? Enter Eurofins Scientific (ENXTPA:ERF), a laboratory-testing juggernaut that we believe offers substantial upside and provides crucial services that keep the world safer and healthier.

Eurofins is a top 3 position in our Global Equity Fund and despite it being up 12% following the release of its Q1 CY2025 trading update, we think it continues to be undervalued by the markets at 8x Fwd EBITDA vs peers at 11x.

Many investors have never heard of Eurofins Scientific, yet this French-based global leader in testing is woven into the everyday products we all consume. From ensuring your salad’s lettuce is free from harmful bacteria to helping pharmaceutical giants develop life-saving drugs, Eurofins is often the invisible player behind the scenes.

But “invisible” doesn’t mean inconsequential. With over 900 labs across 62 countries, Eurofins processes more than 450 million tests each year. Its scope stretches across food and feed safety, environmental analysis, pharma and biotech services, clinical diagnostics, and much more. And while broad diversification can sometimes dilute a company’s focus, Eurofins has turned scale, scientific rigor, and local autonomy into a formidable moat that underpins its steady (and often underappreciated) growth.

In this article, we’ll explore how Eurofins operates, why it holds such a commanding position in an array of critical sectors, and where we see the upside for investors. Think of it as the under-the-radar powerhouse that, much like the “monopolies” we championed in our earlier piece (“Monopoly Magic”), delivers durable outperformance by virtue of its leadership, scale, and strategic vision.

From a Lab Startup to a Global Powerhouse

Eurofins Scientific was founded in 1987 by French scientist Gilles Martin. Back then, it was just a small spin-out using one novel method to detect food fraud. Today, it’s a sprawling network of 62,000 staff and more than 900 labs worldwide, with annual revenues of nearly €7 billion. The company’s mission could be summed up in three words: “Testing for Life.”

What does that mean in practice?

• Food & Feed Testing – Checking everything from chicken nuggets to pet food for contaminants, quality, and authenticity. (Ever wonder if that “100% pure honey” label is real? Eurofins has the isotopic technology to find out.)
• Environmental Testing – Monitoring air, water, soil, and industrial waste for pollutants and “forever chemicals” (PFAS), ensuring compliance with ever-tougher regulations.
• Pharma & Biotech Services – Supporting drug discovery, clinical trials, and the quality control of medicines, including some of the world’s leading-edge cancer therapies and vaccines.
• Clinical Diagnostics – Running specialized tests for hospitals, clinics, and even patients themselves, from genetic screenings to advanced oncology diagnostics.

This remarkable breadth has turned Eurofins into the go-to laboratory for virtually any type of analytical challenge. Whether a multinational food giant needs pesticide screening on short notice or a biotech startup needs advanced bioanalytical testing, Eurofins says, “We’ve got a lab for that.”

Network Effects in Testing? Yes, Really

We often think of network effects in social media or e-commerce: the more users, the more valuable the network. For laboratory testing, you might ask, “Where’s the network effect?” The answer lies in scale and data.

With hundreds of millions of tests run annually, Eurofins amasses an unparalleled trove of data on contaminants, drug interactions, and environmental pollutants. That helps the company refine methodologies, develop new assays more quickly, and offer specialized services that smaller labs can’t easily replicate.

Add to that its global footprint. Many large multinational customers (think of big beverage producers, pharma giants, or large-scale farming co-ops) prefer a single testing partner in all key markets — one capable of meeting consistent quality standards in everything from a US-based drug trial to a Japanese environmental analysis. Eurofins’ coverage is simply tough to beat.

Put differently, the more clients trust Eurofins with their tests, the more cost-efficient and data-rich Eurofins becomes. It’s a virtuous cycle that helps keep smaller players from catching up. In our earlier piece “Why Monopolies Outperform,” we championed how dominant market positions can turn into a powerful engine for outperformance. Eurofins exemplifies this in the lab world.

Why We Think the Upside Is Significant

1. Secular Growth Drivers

• Tighter regulations: Governments worldwide are raising the bar on food safety, environmental protection, and product quality. Contaminant thresholds keep getting stricter—PFAS chemicals, microplastics, advanced pesticide screening—leading to more mandatory testing.
• R&D outsourcing: Pharma and biotech companies increasingly outsource lab work to specialized providers like Eurofins. Rather than funding in-house labs, they leverage Eurofins’ scale, expertise, and advanced equipment.
• Consumer awareness: Shoppers expect organic produce that’s genuinely organic and salmon that isn’t laced with microplastics or antibiotics. That consumer demand for transparency is fuelling more third-party checks and certifications—which is precisely Eurofins’ sweet spot.

2. accelerating cashflows 

After years of heavy investment in new labs, acquisitions, and digital infrastructure, Eurofins has begun reaping serious free cash flow. In 2024, free cash flow surged to roughly €800 million, a record high. With many of its big expansion projects complete, more revenue now drops straight to the bottom line.

We’ve seen this film before in other “monopoly-like” businesses: first, invest aggressively to build scale and capabilities; then, enjoy rising margins and cash flows as you leverage that infrastructure across a vast client base.

3. Inexpensive Valuation

Despite its global reach and healthy margins, Eurofins trades at a Fwd EV/EBITDA multiple that’s around 7-8x (as of May 2025) — significantly lower than several comparable testing/inspection/certification companies (which typically hover in the low-to-mid teens). For a company with leading positions in food safety, environmental analysis, and pharma services, we see that as a discount that doesn’t square with the quality and growth potential Eurofins brings to the table.

Management evidently thinks so, too: after an extended period of funding acquisitions via new share issuance, Eurofins is buying back shares. When the people at the top decide their stock is undervalued and shift from issuing equity to repurchasing it, that’s typically a strong vote of confidence.

4. A Clear Path to Margin Expansion

Eurofins’ “mature scope” labs already run at around 24% EBITDA margin, but the group’s overall margin is around 22%. This gap is due to newer labs (startups or recently acquired facilities) that haven’t reached full utilization or integrated completely. As those labs mature, management believes the consolidated EBITDA margin could approach 24–25%. We think that an extra 2–3 margin points on €7+ billion in revenue can move the profit dial quite meaningfully and can underpin share price upside as well.

Monopoly-Like, But Without the Antitrust Drama

As we argued in “The Power of Monopolies” we at 5AM Capital don’t shy away from businesses that hold near-dominant positions, provided they do so responsibly. Eurofins lands in that sweet spot.

Unlike a tech giant that might face antitrust lawsuits if it’s seen to be “crushing” competition, Eurofins actually benefits regulators by upholding quality and compliance. No consumer is hurt by having the best labs in the world verifying safety and authenticity. Quite the opposite.

Of course, lab services aren’t entirely immune to scrutiny. Regulators want to ensure no data manipulation. Eurofins must maintain rigorous standards; but its track record (barring a rare misstep) is strong, and there’s no sign that any government aims to “break up” the testing sector. Indeed, testing for safety is the kind of essential, behind-the-scenes function that societies want to see consolidated in highly reliable hands.

One reason we also like businesses with strong “moats” is that many also diversify across end markets — think Amazon Web Services or a global toll-road operator. Eurofins similarly casts a wide net:

• Food & Feed (roughly 35% of revenue)
• Pharma & Biotech (15–20% of revenue)
• Environmental (~15% of revenue)
• Clinical Diagnostics (10–15% revenue)
• Consumer Products & Forensics (smaller but growing)

If, for example, the biotech industry has a temporary slowdown (as happened in 2024 when small-cap biotech funding dried up), robust demand from environmental testing can pick up the slack. That’s exactly what happened last year: while part of Eurofins’ biopharma business dipped ~10%, environment testing and food safety increased, driving overall revenue up nearly 7%.

Such diversification not only stabilizes returns through economic ebbs and flows; it also demonstrates how adept Eurofins is at channelling internal resources. When one vertical slows, lab space and scientific talent can often pivot to meet rising needs in another.

You might ask, “Isn’t testing a commodity? A sample is a sample — surely competition undercuts on price?” Testing is highly technical, strictly regulated, and can involve advanced equipment that costs millions. Accuracy and turnaround time can make or break a supply chain or a clinical trial.

• Regulatory Credibility: For a pharma company submitting a drug for FDA approval, you can’t risk sending samples to a lab that’s unproven or possibly in violation of good laboratory practice (GLP). Eurofins’ name carries weight with regulators and inspectors globally.
• Method Validations: Once a client invests time and money to validate a specific test method with a particular lab, switching to a competitor would require revalidation—costly in both time and regulatory risk. This “switching cost” fosters sticky relationships.
• One-Stop Shop: If you’re a multinational brewer, do you want to deal with a patchwork of small labs for each region, or hand everything to a single provider who can test water, grains, packaging, and final products consistently from Europe to Asia? The latter is a no-brainer.
• Ongoing Innovation: Eurofins invests heavily to develop novel assays. For instance, it was at the forefront of advanced genetic testing and mass spectrometry for new contaminants. Clients prefer a partner that’s always building tomorrow’s tests.

AI as a Catalyst, Not a Competitor:

Unlike software-centric businesses that face existential disruption from AI, Eurofins’ moat lies in its vast physical laboratory infrastructure, regulatory accreditations, and proprietary biological and chemical testing protocols — domains where AI is a tool, not a threat. The company stands to benefit from AI through enhanced automation in lab workflows, faster data analysis, and improved predictive diagnostics, allowing it to scale throughput and reduce cost per test. In a world of increasing complexity in genomics, food safety, and environmental compliance, AI enhances Eurofins’ value proposition — it doesn’t replace it.

Founder-Led Culture

Lastly, Gilles Martin, still at the helm decades later, has infused Eurofins with a distinct culture: decentralized, entrepreneurial, but disciplined. Each lab runs almost like a mini-company with its own P&L, while central HQ provides overarching infrastructure, financing, and quality frameworks.

That combination of local autonomy plus group-level resources can be powerful. It lets labs innovate quickly to meet local demand (like setting up an asbestos-testing unit in Japan when regulations tightened there), while still benefiting from centralized scale (bulk purchasing for the entire group, shared R&D knowledge, etc.).

Crucially, this is a founder-led business. Martin holds a significant stake (>30%) and has a personal interest in seeing the group flourish for decades, not just next quarter. That’s a big checkmark in our eyes. In “The Power of Monopolies” we praised how founder-led firms tend to take the long view, often compounding returns more steadily than management teams that hop around. Eurofins is no exception: from IPO in 1997 to now, the share price has compounded at circa 24% annually on average.

The Market Isn’t Fully Pricing Eurofins’ Potential

So, why the undervaluation? In our view, a few factors may have weighed on Eurofins’ share price since 2023:

• COVID Overhang: The market briefly saw a massive spike in Eurofins’ earnings from PCR testing, then a drop. Some investors worried the decline post-COVID overshadowed the core growth.
• Biopharma Soft Patch: Small biotech funding slumped, slowing some early-phase R&D testing. That overshadowed robust growth in other segments, scaring off momentum-minded investors.
• General Market Jitters: Concerns over inflation, interest rates, and global slowdowns had many investors fleeing to “safe” or “familiar” names, ignoring less headline-grabbing mid-caps in Europe.

If you needed a test of a lab network’s agility, the pandemic certainly provided it. Almost overnight, global demand for routine clinical testing and environment sampling went haywire as entire regions locked down. But Eurofins pivoted swiftly, setting up massive COVID testing capacity—and performed tens of millions of PCR tests across multiple countries.

That brought a short-term revenue surge in 2021–22 (COVID testing was high-margin). Some investors worried about a “hangover” once the pandemic faded. But the data for 2023–24 show Eurofins’ core businesses returned to healthy growth, more than offsetting the COVID wind-down. Meanwhile, all those labs and IT systems built for pandemic testing are now being redeployed for advanced clinical diagnostics, genomics, and new specialized assays in environment, pharma, and consumer goods.

This surge of new high margin COVID testing revenue led to a surge in share price in 2021… and then was followed by a bust in 2022, 2023 and 2024. Entering mid 2025, we believe the remnant of this COVID era has now finally flushed through the financial statements and investors will be able to model the underlying growth of the business going forward, setting the stage for strong share price appreciation going forward.

We believe all 3 of these are temporary or overblown concerns. Meanwhile, the fundamentals—diverse demand, strong operating margins, growing free cash flow—remain robust. And with a share buyback in progress, Eurofins itself is telling the market: “We’re worth more than the current price.”

As the biotech cycle recovers—and it always does, given big pharma’s healthy pipelines—and as inflationary worries normalize, we expect sentiment to realign with Eurofins’ steady, multi-segment growth story.

Risks and Mitigations

No investment is entirely risk-free, so let’s be clear-eyed about the potential drawbacks:

• Continued Biotech Weakness: If small-cap biotechs remain underfunded for a prolonged period, it could mean a multi-year drag. However, big pharma and mid-tier biotech typically sustain R&D, and Eurofins still has other segments to cushion any slack.
• Regulatory Changes: Labs operate under strict rules, from FDA to EPA and beyond. If, hypothetically, a major new method made traditional offsite testing obsolete, that could pressure labs. Yet, advanced tests increasingly require specialized expertise, so we see that as a minor risk.
• Operational Scale: Running 900 labs worldwide is not trivial. Quality and data integrity have to be airtight. A big scandal (e.g., systematic data falsification) would be damaging. But for over 35 years, Eurofins has upheld a largely solid reputation, swiftly dealing with any isolated missteps.
• FX and Macro Volatility: With about half its revenue in Europe and a large chunk in North America, currency swings can impact earnings translation. Over the long haul, currency variations tend to even out, but short-term volatility is always in play.

5AM Take: A Vital (and Profitable) Industry, with Room to Run

Lab testing might not have the glitz of big tech or the everyday familiarity of consumer brands, but it occupies a critical space—particularly as global population growth, stricter regulations, and greater consumer awareness intersect. Eurofins, standing at the forefront, has the scale and technological depth to serve that mounting demand.

We see the next few years as a “harvest” phase, where earlier investments in new labs and acquisitions translate into even stronger cash flows and margin expansion. The share price has room, we believe, to rerate at least 40–50% from current levels (€55) if the market normalizes its multiple to align with peers — or if the company’s growth outstrips conservative forecasts (which has happened more than once in its history).

In our earlier Livewire piece “The Power of Monopolies” we described how dominant market positions and wide moats can create outperformance that compounds over time. Eurofins ticks those same boxes: it’s not a monopoly in the classical sense, but in many market niches (like advanced food testing or certain pharma assays), it’s the de facto leader. And that position looks set to remain unassailable for the foreseeable future.

For investors seeking a long-term, quality compounder that quietly underpins huge swaths of global commerce—and trades at a valuation we consider quite appealing — Eurofins Scientific warrants serious consideration.

At 5AM Capital, we’re betting that “Testing for Life” won’t just keep us healthier; it’ll keep our portfolios healthier too.

Thanks for reading.

Sam Chipkin (CIO & Founder, 5AM Capital) & Tom Perfrement (Investment Manager)