Veeva Systems (VEEV)
A dominant force in life sciences cloud solutions
Disclaimer: the opinions expressed are my own and should not be mistaken for financial advice. Do your own due diligence before purchasing any equities mentioned in this article.
This week I want to take a step back from hyper-growth stocks and dive into a company that has proven to be a solid, consistent compounder. I like diversifying my portfolio with growth companies in various stages of maturity and this week’s focus is a company who has been an established industry leader for years. Veeva Systems, ticker symbol VEEV, is a leading provider of cloud-based solutions for the life sciences industry. Veeva went public all the way back in 2013 and provided shareholders with nearly 3x returns over the S&P 500.
So what exactly do they do? Veeva provides a cloud-based software as a service (SaaS) platform offering a variety of products - Clinical, Regulatory, Quality, Safety, Medical, Commercial and Data - that help life sciences companies bring products to market faster, sell more efficiently, and maintain compliance with government regulations. Their offerings span customer relationship management (CRM), content management, master data management, customer reference data and commercial data/analytics. While it may sound like any of the hundreds of other data management platforms, Veeva was tailor-made to solve common problems for life sciences companies. The founders believed operating challenges and regulatory requirements of Pharmaceutical, MedTech and Biotech companies could only be properly addressed by a platform specifically designed for the industry. As a result, Veeva has drawn on industry expertise and developed purpose-built products on a scale that no other company in their market has been able to match.
Veeva’s Wide and Expanding Moat
Over the last 15 years, Veeva has built a wide moat while establishing themselves as the leader in life sciences cloud software. The company has created a large competitive advantage over generic CRM providers by tapping into their industry expertise to design products that solve industry-specific operational challenges. One such example is bringing a new product to market, which requires successfully managing a clinical trial and overcoming regulatory hurdles. Veeva’s platform consolidates traditionally siloed and disconnected workflows and enables their customers to manage the entire lifecycle of a clinical trial. Industry best practices are also baked into Veeva’s solutions, providing an added level of quality assurance. While competitors do offer some of the same solutions, there isn’t a product on the market that can match Veeva’s comprehensive platform, which is where their primary advantage lies. Additionally, management has not identified a single vendor that can compete with ALL of Veeva vault applications.
Veeva also benefits from several other moat factors: a large product ecosystem and high switching costs. The Veeva platform offers customers a highly cohesive product ecosystem, spanning from commercial solutions (cloud, data, analytics) to R&D solutions (clinical, quality, regulatory, safety). A customer may start with a product to solve a specific issue, realize the value, and add more products, all of which fit together in a connected data architecture. As a result, Veeva is able to not only better retain customers, but upsell as they adopt more solutions. Once a customer has adopted multiple products, it becomes very difficult to switch - a 119% revenue retention rate demonstrates the stickiness of the platform. Customers currently average almost 3 R&D products and 4 commercial products, figures that have grown from 1.71 and 2.78 in 2017, respectively. The figures below also indicate that many customers have adopted at least 3 R&D products and half of Veeva’s clients use between 4-8 commercial products:
Product Innovation and New Verticals
One of this company’s most promising long-term growth drivers continues to be optionality. For years, Veeva has fine-tuned and improved their applications while innovating and developing new solutions. The two previous graphics clearly demonstrate that Veeva has not only introduced many new products, but they have seen rapid adoption from customers. As discussed, the Veeva platform is highly cohesive, providing many tightly-integrated applications. This encourages customers to use more products by providing a high degree of connectivity, helping to further break down data siloes. The following graphic highlights the platform’s many life sciences solutions, but Veeva sees expansion beyond this industry (and has already started planting these seeds).
Veeva management believes there is a ton of opportunity to penetrate other verticals, namely chemical, consumer goods and cosmetics. The Veeva platform has traditionally dominated life sciences, but the products actually mesh well with these other industries because they all require some type of clinical trial and regulatory compliance before going to market. With the number of industry-spanning solutions offered by the Veeva cloud, the company has positioned itself to attract customers from these other industries. Management currently estimates a total addressable market of $13 Billion, of which they have captured roughly 15%, so it will be vital that the company start seeing growth in these other verticals, something I will be watching going forward.
While hyper-growth is in the rearview mirror, Veeva has continued to post 25%+ year-over-year growth numbers and estimates roughly 17% revenue growth in 2022 and 2023. The company has also produced strong, consistent gross margins around 72% and continues to expand already impressive operating margins while growing the bottom line annually. To top if off, Veeva has amassed $1.1 Billion in cash through growing free cash flow and they carry very little debt. As a result, the balance sheet is a fortress.
The projected slowdown in top line growth is somewhat concerning, but the management team has demonstrated a high level of competency in turning the company into a cash-generating machine, so I am willing to be patient. Additionally, they have established a sizable moat in life sciences cloud solutions and have started to expand into other verticals, both of which instill confidence in Veeva’s long-term outlook.
Some Notes on Management
Peter Gassner, Veeva’s original founder and current CEO, still runs the company 15 years after inception. Earnings a 92% Glassdoor.com approval rate, he is also well-respected by his employees, who also give the company 4/5 stars. With 30 years of experience in the tech industry, Gassner is the visionary behind Veeva and has proven himself as an exceptional leader. Rounding out the management discussion, 13% of the Veeva’s shares are owned by insiders, indicating leadership has a vested interest in the direction of the company. Veeva is in good hands, and as long as that remains the case, I feel confident holdings shares.
Looking at valuation multiples, Veeva is trading at near all-time-lows using most relevant metrics:
Forward Price/Earnings - 62 (all-time-low)
Forward Price/Sales - 11.44 (8.5 all-time-low)
Forward FCF - 32 (31 all-time-low)
These lows date back to the company’s IPO in 2013, meaning Veeva has only ever traded on the public markets during a secular bull market. These multiples and historical comps must be taken with a grain of salt, but the company is currently trading at near all-time-low valuations. With that being said, the macroeconomic environment is brutal and multiple compression has punished any stock with elevated price ratios, so in that regard Veeva is still a bit expensive.
Despite the company’s wide moat and strong balance sheet, there are several risks to be aware of. The first is the slowdown in revenue growth. 17% top line growth is nothing to shrug off, especially in a potential recessionary environment, but it’s a bit of a drop-off from the 28% CAGR the company has experienced since 2018. Along those lines, revenue retention dropped from 124% to 119%, suggesting customers are spending less on the platform. Granted, 119% is still a solid number, but if this figure continues to trend downward, this could be cause for alarm.
Another risk is the ongoing legal battle with Veeva’s closest competitor, IQVIA. They claim that Veeva stole data, used it for their own benefit, then destroyed the evidence. Veeva has since responded and claims the whole thing is a disinformation campaign. As retail investors, there’s no way for us to know what really happened as this likely won’t be settled until 2023. Regardless of the outcome, it’s not a good look and the company would certainly be negatively impacted if they were found guilty.
The last risk to be aware of is Veeva’s partnership with Salesforce. The two companies have an agreement signed through 2025 which allows Veeva to use the Salesforce1 Platform to host their CRM solution. The status of this agreement warrants monitoring as 2025 approaches. Despite any pitfalls from the two companies potentially not coming to an agreement, Veeva has been around this industry long enough that I have confidence in their ability to navigate whatever situation may arise.
Despite these risks, Veeva has proven itself to be an outstanding and consistent growth compounder since the company hit the public markets in 2013 and I believe they can continue to execute at a high level. Management has created a cash-generating machine that continues to grow profits while maintaining impressive operating metrics. Veeva has also built a wide boat in life sciences cloud solutions and has demonstrated the ability to expand into new verticals. Combine these growth factors and I believe this company can continue to deliver solid results for years to come.
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