Veeva Looks Beyond Life Sciences

Veeva has two business segments: Veeva Commercial Cloud, its vertically integrated CRM products, and Veeva Vault, its horizontally integrated content and data manager. Commercial Cloud products can manage all forms of interaction between a biotech company and its customers. This product portfolio is built through a partnership with Salesforce.com CRM on the Salesforce1 platform. We estimate Veeva has expanded its biotech CRM market share to 65%. Furthermore, by operating in the life sciences vertical, Veeva has developed software specifically tailored to these companies, thereby reducing its customer acquisition costs and increasing cross-sales; 66% of revenue growth in 2016 came from existing customers.

The Vault product is built on an internally developed proprietary platform, leading to higher margins, and benefits from substantial switching costs. This has been a boon to the company, as increased need for regulation and quality control, especially in healthcare, warrants more sophisticated content management solutions. We believe recent exuberance surrounding Veeva is a result of its Vault QualityOne quality management system, which holds appeal in regulated industries outside of life sciences, such as chemicals and consumer packaged goods. Currently, non-life sciences clients make up only around 10 of Veeva’s 520-plus customers; however, we believe this product has the potential to serve as a beachhead to additional non-life sciences customers and drive solid growth over the next few years.

We expect Veeva’s level of innovation, capacity to identify underserved industries, entrenched position, and ability to increase its total addressable market through new product launches to endure.

Customers Don't Easily Switch We believe Veeva has a wide economic moat formed by intangible assets and high customer switching costs. Veeva began as a customer relationship management company with a focus on the life sciences industry, but it has since established two pillars of its core business, Commercial Cloud and Vault. These two business segments, each with a growing suite of specific products, have been adopted by more than 500 customers, including the majority of large-cap pharmaceutical and biotech companies.

Veeva operates in a niche market by exclusively focusing on the life sciences space and, as a first mover, faces little competition. It began by replacing outdated CRM products and benefited from the regulatory intangible assets associated with the life sciences niche. Veeva’s products are typically government-mandated necessities, which precludes the business from a scenario where negative headwinds could reduce the discretionary spending of the company’s life sciences customer base. Veeva’s development of vertical-specific software has let the company accumulate a large body of knowledge about the specific regulatory issues and compliance needs of its users. Veeva has used knowledge of the industry to develop and sell complementary products to existing customers, increasing value per contract while keeping customer acquisition costs manageable. Furthermore, other CRM offerings tend to be on-premises solutions that require more complicated and time-consuming installations, whereas Veeva’s cloud-based platform can go live in a shorter time and quickly scale as the number of users in an organization grows. Veeva has won contracts with large pharmaceutical companies, which we view as evidence that its offerings must have above-average functionality, instead of just appealing to price-sensitive customers.

The Commercial Cloud segment, the foundation of which is the company’s CRM application, is vertically integrated and provides a collection of products designed to help life sciences companies market their products more effectively. Estimates suggest Veeva controls 65% of the life sciences CRM space, compared with estimates of QuintilesIMS’ Q 15% share. The infrastructure of Veeva’s CRM products is built using Salesforce.com’s Salesforce1 Platform. The current agreement between the companies, which extends to 2025, is mutually beneficial for both parties. Veeva leverages Salesforce.com’s infrastructure to sidestep development costs and can operate in the life sciences space without competition. In tandem, Salesforce.com is guaranteed a certain amount of Veeva’s revenue and Veeva is precluded from selling its CRM products outside the pharmaceutical and biotechnology industries. However, Veeva has successfully expanded Vault, its suite of joint content and data applications built on proprietary software with appeal outside the life sciences industry. In fiscal 2017, Vault grew from 219 to 334 customers while commercial cloud grew from 212 to 259 customers. Ultimately, the intangible assets as a result of Veeva’s agreement with Salesforce.com and the immense regulatory data necessary to hold appeal in the life sciences space strengthen Veeva’s moat.

Veeva’s initial CRM products allowed drug companies to streamline their salesforces. As a company’s salesforce becomes accustomed to using Veeva’s software, switching costs rise, especially given the centrality of the platform to a company’s sales and marketing efforts. As Veeva has built out its suite of products, its pharma and biotech clients have continued to integrate Veeva’s offerings. We forecast an increased ability to cross-sell to existing customers as Veeva adds products to its enterprise platform. Vault, the company’s content and data manager, can accomplish a plethora of tasks including storing call center scripts, housing process documents in a manufacturing setting, and tracking regulatory submissions for a new drug. Pharmaceutical clients using Veeva CRM have adopted Vault to manage clinical drug trials and ensure stringent adherence to regulatory guidelines. Thus, the increased adoption of complementary Veeva products, some of which house critical drug data, creates even stickier customer relationships. Clients are likely to avoid migrating sensitive data to a competitor’s platform unless subscription fees become exorbitant. Veeva’s customer revenue retention rate was 127% in fiscal 2017, which is calculated by combining customer churn with cross-sales or upsells, and the number has always been above 100%. This further demonstrates Veeva’s entrenchment in client operations and ability to charge increasing or premium prices for its offerings.

Lastly, the horizontally integrated platform appeals to highly regulated industries beyond life sciences, which includes chemicals, manufacturing, and consumer packaged goods. Vault provides quality management, which allows the company to house highly sensitive information, such as a document that demonstrates how a machine needs to be cleaned; Vault can track who opened that document, who emailed that document, and who made changes to that document. We believe that Vault’s management of sensitive data creates switching costs outside of the life sciences industry.

Veeva’s business model seeks to expand the company’s switching costs. Veeva introduces its newer products to a set of early adopters, ranging in size from small biotechs to large pharmaceutical clients, before rolling these products out to its entire customer base. This allows the company to test the functionality of new products, preventing customer dissatisfaction or other issues that could lead to delays in implementation or customer churn. Moreover, early adopters receive slight discounts on subscriptions, which may serve as an incentive to attract clients outside Veeva’s established customer base before the switching costs associated with its software take hold.

Customer Concentration High but Improving Veeva faces medium uncertainty, in our opinion. The company's revenue retention rate has remained close to 100% for the past several years, with minimal churn among its existing customers. Because of the high switching costs associated with its products, we expect the company to maintain leading market share.

Veeva’s products typically help clients with critical operating tasks, some of which are government mandated. Therefore, if cyclical headwinds affected the discretionary spending of Veeva’s base, we would not expect a high customer churn among existing clients.

Still, because a majority of the company’s revenue comes from a set number of large pharmaceutical companies, the loss of even one contract could have a material impact on the overall business. Nearly 45% of the company’s revenue comes from Veeva’s top 10 customers, down from 50% the prior year. Furthermore, there is uncertainty surrounding the ease with which Vault and Network can scale and expand to various customer bases. Vault has begun expanding outside the life sciences industry, and it remains to be seen whether this initiative will be a sustained driver of growth. As Veeva enters markets where customers need quality control, such as chemicals and consumer packaged goods, it remains to be seen whether it can continue expanding into other businesses. Additionally, Veeva could face tougher competition from entrenched software players like Oracle ORCL and Microsoft MSFT, which have enough capital to strengthen their existing CRM and content management applications or acquire a smaller competitor.

Veeva is in excellent financial condition, with a strong balance sheet. We believe the company will continue to use the cash it generates from operations to fund future acquisitions or growth opportunities. Even if subsequent acquisitions were to occur, we forecast increasing liquidity as the company’s reserve of cash will increase. The fact that the company has remained profitable while growing at a rapid pace bolsters our belief that management has done a fine job balancing innovation with profitability and will continue to allocate capital wisely as the company’s products mature.