Veeva Extends Its Leadership

Founded in 2007, Veeva Systems VEEV has grown to become the leading vertical software provider specifically supporting the mission-critical operations of the life sciences industry. This dominant position enables Veeva to generate excess returns commensurate with a wide-moat company. We expect the company’s strong retention, continued development of new applications, increasing penetration with existing customers, addition of new customers, and expansion into industries outside life sciences to allow Veeva to extend its market leadership.

The company operates in two categories: Veeva Commercial Cloud, which entails vertically integrated customer relationship management services, and Veeva Vault, a horizontally integrated content and data manager. Veeva’s CRM application supports real-time collaboration and regulatory oversight and enables incremental add-on solutions. The incremental functionality is critical to improving marketing programs while remaining in compliance with mandated antikickback laws and statutes. This service has been well received by the life sciences industry and has propelled Veeva to the leading position in this niche with over 80% share (based on seats). As a follow-on, management introduced the Veeva Vault platform to broaden the portfolio that addresses the needs of the life sciences industry outside CRM. Each module offers features and functionality targeting four key areas in life sciences: clinical (research and development), regulatory (compliance), quality of manufacturing, and safety.

Veeva has earned a strong reputation in life sciences and continues to develop new adjacencies to further entrench itself in the core operations of its customers. Strong execution and codevelopment partnerships with early-adopter customers have enabled the company to introduce robust solutions that leverage its Vault network, modules, and regulatory domain expertise. In parallel, the company has created incremental use cases, allowing it to expand into industries outside life sciences that have regulatory interplay, such as cosmetics, chemicals, and consumer goods.

Wide Moat Is Trending Positive Switching costs and to a lesser degree intangible assets are the primary drivers of Veeva's wide economic moat. Our position is that several factors drive switching costs for software. The most obvious is the direct time and expense of implementing a new software package for the customer while maintaining the existing platform. There are indirect costs along those same lines, mainly lost productivity as customers move up a learning curve on the new system along with the distraction of users involved in the function where the change is occurring. Also, there is the operational risk, including loss of data during the changeover, project execution, and potential operational disruption. The more critical the function and the more touch points across an organization a software vendor has, the higher the switching costs will be.

Pharmaceutical companies have strict workflows for conducting clinical trials, research, manufacturing, and marketing commercial pharmaceuticals, but they have had limited IT options to improve efficiency and compliance in the evolving regulatory landscape. Before the introduction of Veeva’s products, the life sciences industry largely relied on inflexible components of highly customized legacy enterprise resource planning packages. Unlike its peers in the highly fragmented market, Veeva introduced innovative solutions providing real-time work solutions that enable clients to improve efficiency and track milestones while adhering to strict U.S. privacy laws and numerous other global regulations. On the commercial side, Veeva’s solutions support accurate documentation and allow customers to stay abreast of the changing global regulatory landscape. For development customers, Veeva provides protocols and guidelines that facilitate more rapid drug commercialization. The financial cost and learning curve are significant, and unplanned downtime, a system breach, or data loss could be catastrophic. This integrated offering leverages domain expertise in seamless technology, differentiates Veeva from the limited competition, and, in our view, should generate strong returns on invested capital for the next 20 years.

Ultimately, high switching costs and Veeva’s life sciences domain expertise provide a substantial moat. Having garnered over 800 customers across roughly 130 countries, including 19 of the top 20 life sciences companies, Veeva is the leading life sciences software vendor (by spending, according to IDC). Its industry-proven products and domain expertise increase the robustness of the offering and assist in maintaining dollar retention trends above 100%. Veeva’s products support mission-critical functions, ensuring that they are performed in a compliant manner, and as a result, they have become engrained in life sciences operations.

The company reports in two segments: subscriptions and professional services. Subscriptions include monthly software usage and represented over 80% of revenue in fiscal 2019, while professional services consist of implementation and training and made up the remaining 20% of revenue. Subscription revenue consists of Veeva Commercial Cloud and Veeva Vault, the two operating platforms. Veeva Commercial Cloud is the company’s CRM application offered through the Salesforce.com partnership, which is vertically integrated and provides a collection of products designed to help life sciences companies market their products more effectively while remaining compliant with relevant regulation. Veeva has over 80% share in this subsegment. It is one of Salesforce.com’s many vertical resellers, and the relationship is contracted on a fixed cost per seat basis extending through 2025. This relationship was established when Veeva’s founding partner was a Salesforce.com employee and Salesforce.com was not interested in pursuing a vertical strategy.

Veeva Vault was introduced in 2011 and is the proprietary platform through which the company provides its modular applications. In fiscal 2019, Vault grew from 574 to 604 customers, while Commercial Cloud grew from 335 to 339 customers. Veeva Vault revenue has grown rapidly in the life sciences industry and now represents nearly half of the company’s overall revenue. The company continues to expand into new areas to fuel growth. Most recently, Veeva has moved into other regulated industries outside life sciences, including cosmetics and chemicals, as these have some regulatory crossover. The company also introduced an artificial intelligence program, Andi. While Andi is available as a stand-alone solution, some of the functionality is embedded throughout the CRM and Vault platforms. This offering provides best-practice suggestions based on the company’s domain expertise, which should further drive efficiency and compliance.

We believe Veeva has a positive moat trend. We think it has established itself as a key strategic partner for the life sciences industry much in the way ServiceNow and Salesforce have done in the IT operations management and sales functions, respectively. Veeva is the leader in an industry where the top 50 life sciences companies are estimated to account for half of the industry’s IT spending, and continues to expand its addressable markets. Its proprietary platform, Vault, was introduced in 2011 and has doubled annually, now representing nearly half of total revenue. We see the rapid adoption as further support that the company has built a disruptive and best-of-breed solution. Growth should continue to be fueled by new product launches and features, such as artificial intelligence, to sell to Veeva’s loyal customer base leveraging its domain expertise. As the company increases its wallet share among current customers, switching costs make it harder for a new player to upend Veeva’s entrenched position.

Veeva continues to invest in developing a wide variety of modules to increase wallet share among its customers. As customer operations have become increasingly reliant on Veeva for mission-critical functions, we believe it has become more difficult for a customer to switch away. Commercial Cloud and Vault customers subscribe to 3.0 and 2.2 products on average, respectively. Commercial Cloud figures are higher as it is a more mature offering. These figures have increased over time with the introduction of new features and add-on modules.

Medium Uncertainty, Strong Balance Sheet We assign Veeva a medium fair value uncertainty rating. Revenue growth will be an important metric, and a significant deceleration would adversely impact shares in our view. Although, Veeva is probably one of the largest vertical software-as-a-service providers, it has consistently reported strong revenue growth that investors have become accustomed to.

Veeva is likely to continue to have high customer concentration levels, as the largest life sciences companies still account for a significant portion of overall industry spending. As of fiscal 2019, the top 10 customers accounted for 39% of revenue, down from 45% and 42% in fiscal 2017 and fiscal 2018, respectively. We understand that roughly half of life sciences IT spending is generated from the 50 largest companies. Despite Veeva’s incremental small and medium-size business additions to its Vault services, most of the growth will continue to target the largest life sciences enterprise users, in our opinion.

Changes to the existing partnerships with Salesforce.com or a negative outcome with the pending IQVIA litigation and Veeva’s follow-on counterclaim are risks that should be considered. Currently half of the company’s revenue is generated from the CRM offering that is provided over the Salesforce.com platform. We do not believe there is substantial risk around this agreement with Salesforce.com, which supports many other vertical clients over its horizontal platform. Salesforce.com could consider offering a lower-end vertical option that could compete with Veeva’s CRM offering, but the latter company’s current entrenched position would be difficult to upend, in our view. Similarly, a negative outcome in the pending litigation with IQVIA could have an adverse impact on Veeva’s data offering, as IQVIA is the leading provider of pharmaceutical data pricing. There are other sources of pricing data, but this is a small component of Veeva’s business.

We believe Veeva enjoys a position of solid financial strength arising from its strong balance sheet and leading position in a growing market. As of fiscal 2019, Veeva had over $1 billion in cash and short-term investments and no debt. We believe the company will continue to use the cash it generates from operations to fund future acquisitions or growth opportunities. From our perspective, management has been disciplined about M&A and taking on debt. The 2016 acquisitions of Zinc Ahead and Qforma CrowdLink were the company’s largest to date, totaling $116.5 million, and paid for in cash. We assume the company will continue to make small tuck-in acquisitions and will be able to fund them through available cash and cash flow from operations. Even in this scenario, we forecast rising liquidity, as the company’s reserve of cash should continue to increase.