Veeva Systems – Taking Pharmaceuticals to the Cloud(s)

Those familiar with cloud services companies usually think of the high-flying (CRM US) as the standard-bearer for success. Salesforce is the largest provider of cloud-based customer relationship management (CRM) software services in the world, and its expansive and well-integrated ecosystem covers e-commerce, marketing services, analytics and more, helping it best serve customers across diverse industries. In the life sciences industry, however, there’s another player – Veeva Systems (VEEV US) – that’s established itself as the top player, and it’s done so in an interesting way.

Unlike Salesforce, Veeva Systems has built a cloud services platform tailored specifically to the needs of the life sciences industry, which has been slow to transition to the digital-first model. Given the unique issues faced by life sciences companies, from the long time to market from R&D to commercialization to the stringent regulatory requirements for the production and sale of these products, the company’s founders bet that an industry-specific approach could best address these challenges. Their products address a broad range of needs within the industry, such as CRM, data management, application development tools, and quality control and regulatory solutions.

With this focused approach and first-mover advantage, the company has already won over many major pharmaceutical companies, including AstraZeneca, Bayer and Novartis. Also impressive has been Veeva’s ability to expand relationships with existing clients as they grow. For the fiscal years ended January 31, 2018, 2017, and 2016, its subscription services revenue retention rate was 121%, 127%, and 125%, respectively. Even as prices for their services have grown, existing clients have added more products from Veeva’s ecosystem. And this product ecosystem is expanding as well – the company recently launched a new system to manage all aspects of clinical trial data, allowing them to expand their potential client base to biotechnology start-ups as well. As a result, Veeva Systems strong and growing relationships across the pharmaceuticals space, where it sees a total addressable market of over $9 billion dollars for software services. And this approach has certainly paid off:

Veeva Systems Revenue and Operating Income 2011-2018

Source: Veeva Systems

The company has continued its outstanding financial performance as of late, reporting 37% growth in revenues over its last 9 months (ended 31.10.2018) and topping $800 million over the last trailing 12 months (ended 31.10.2018), and the company expects to bring in between $1.0 and $1.1 billion in FY19. This would make them only the 5th software services company to ever reach this milestone. Also impressive has been Veeva’s profitability during time, reached all-time highs on a trailing 12 month basis in gross margin (70.6%), operating margin (23.9%) and net margin (23.6%). As the company grows, additional customers are costing the company very little to serve and its operating expenses are growing at a slower pace than revenues, positive signs that margins can be maintained, if not improved further in the future.

What might be most impressive about all of this, however, is the fact that Veeva’s platform is essentially built on top of Salesforce’s architecture. Salesforce’s AppExchange platform allows third-party developers to create applications and distribute through the platform, akin to Apple’s App Store or Google Play. Not only has Veeva Systems outdone Salesforce and established itself as the top software vendor by sales in the life sciences industry, resulting in almost $1 billion in annual revenues and a market valuation of $15 billion, it has done so using tools given to them by Salesforce. But Salesforce certainly isn’t hurting financially (the company earned $9.7 billion in revenues over the first 9 months of its current fiscal year), and the company’s founder and CEO, Mar Benioff, might even feel a hint of pride at the success of Veeva Systems.

Prior to founding Veeva Systems, CEO Peter Gassner, previously served as Senior Vice President of Technology for Salesforce from 2003 to 2005. Similarly, Salesforce’s Benioff served as a Vice President at Oracle prior to founding Salesforce and creating the cloud services platform model, so it’s only fitting that Gassner built upon the Salesforce model to create a successful platform in the life sciences vertical.

Total Return Analysis

Source: Bloomberg

Forward P/E Comparison

Source: Bloomberg

So how has Veeva Systems done for investors who have held the stock? Over the last 5 years, it has had an annualized return of almost 27%, compared to 20% for Salesforce and 10% for the S&P 500. Obviously investing in such high growth companies comes at a price – current forward P/E (price to next year’s expected earnings) estimates for Veeva Systems and Salesforce are 60.5x and 58.5x, respectively, compared to 15.6x for the S&P 500. Given that the cloud services market is still growing at a blistering pace and that these two companies are market leaders in their respective categories, these valuations are justified. But with Veeva Systems, the upside potential is two-fold: not only could they continue to deliver strong growth on their own and continue to be a leader in the software services business in pharmaceuticals, an industry that itself has significant upside potential, but Salesforce may one day come knocking and make a lucrative offer for Veeva. What could be better medicine than that?