Equity Deep Dive 02: VEEV

VEEVA SYSTEMS: High Potential, Overvalued Market Leader

• VEEVA Systems (NYSE: VEEV) is a leading cloud-based software provider for the life sciences industry.
• Wide economic moats including a strong customer base and high switching costs have boosted the company’s past financial performance.
• Current valuation methods put VEEV at a premium to the market price.
• The next 2 years will prove to be crucial for VEEV as it breaks off from using Salesforce’s platform.

Company Description

VEEVA Systems (NYSE: VEEV) is a global leader in cloud software for the life sciences industry that provides solutions spanning cloud software, data analytics, and business consulting to cater to its specific customer base. The company’s vertical approach covers the full product life-cycle and assists in key business functions. These vary from research & development, to commercialisation of products.

VEEV offers cloud solutions in 2 major product categories – Development, Commercial (including Data Cloud). Veeva Development Cloud is a suite of applications for ensuring clinical operations, regulatory, and safety requirements, through the company’s proprietary Veeva Vault platform. Veeva Commercial Cloud provides software solutions that aid in customer relationship management (CRM), marketing, and sales functions in order to bring products to the market efficiently. Lastly, Veeva’s data offerings allow customers to access and leverage statistics to optimise their business strategies, including Veeva OpenData (key data about healthcare providers, and organisations) and Veeva Compass (de-identified, longitudinal patient data for commercial uses).

VEEV’s top line is derived from subscription services (fees from customers accessing their cloud-based software and data solutions), and professional services for software implementation, training, or services related to Veeva Business Consulting. For FY2023, subscription services revenues contributed to 80% of total revenues, with the remaining 20% from professional services and other revenues.

Today, VEEV serves more than 1300 customers ranging from pharmaceutical companies to emerging biotechs and medtechs. 93% of VEEV’s clients are based in the pharmaceuticals and biotech sector, followed by MedTech (4%) and Consumer Products (3%). In terms of geographies, North America accounts for the majority of the top-line (58%), followed by Europe (28%) and Asia Pacific (11.4%) and Rest of World (2.7%).

Track Record of Growth, Profitability and Financial Strength

In the latest FY2023, VEEV achieved a 16% year-on-year revenue growth, and subscription services revenue was up 17%, from $1,484.0 million to $1,733.0 million. For the latest Q1 for FY24, VEEV beat EPS estimates with $0.91 (actual) versus $0.79 (consensus). From a 5-year perspective, VEEV has a revenue and EBITDA CAGR of 25.6% and 23.2% respectively. Its gross margins are equally impressive, staying above the 70% mark consistently over the years. This is only likely to increase over time as VEEV announced it was moving away from Salesforce’s platform in Sep 2025 and focusing on cost optimisation. In terms of the balance sheet, VEEV has also maintained the lowest debt levels in the industry, with the highest debt-to-equity ratio only at 3.3% in the past 13 years.

VEEV Management: Still Significant Room to Grow

According to VEEV’s latest Analyst and Investor Day, Management highlighted that VEEV has a total addressable market (TAM) of $13B, yet the latest revenue figures ($2.15B) are only one-sixth of the said TAM, implying that there is still untapped market demand that VEEV has yet to cater to. From the product quadrant on the left, we can see that most of VEEV’s products are in their infancy stages with little market power. This further highlights the long runway VEEV has ahead as it continues to heavily invest in R&D as its largest spending category.

Estimates from Houlihan Lokey expect the global Healthcare Information Technology (HCIT) market size to reach around $1070 billion by 2032, representing a 13.5% CAGR from 2022 to 2032. As governments and healthcare providers are rapidly adopting IT and big data solutions and beefing up healthcare expenditures to tackle ageing demographics, workforce shortages and to accelerate clinical breakthroughs for chronic diseases, VEEV is certainly poised to reap these macro tailwinds.

Competitive Advantage: Evolving Customer Base Builds Solid Industry Knowledge

Being a leading provider in more than 30 commercial and research solutions, VEEV’s multitude of product offerings has attracted clients including the largest pharmaceutical and healthcare companies – Merck, Eli Lilly, and AstraZeneca, to name a few. This allows early-stage companies and startups to leverage the know-how and expertise of industry giants, creating a positive network effect built on a solid foundation of industry knowledge.

Put simply by Joseph Bejjani, CIO of Swiss biopharmaceutical Idorsia: “Compliance is key for us, but industry knowledge is extremely important for a relatively small company. We get the collective knowledge of our industry; Veeva cloud solution provides us with industry best practices.”

As more customers integrate into VEEV’s infrastructure and execute their daily operations on the cloud, VEEV also widens its economic moat of high switching costs. The decision to move a life sciences company away from VEEV’s systems is a costly and time-consuming endeavour, as the data migration, re-training, and reintegration into a new platform are major pain points that could lead to potential business disruption. These factors create customer stickiness to VEEV’s software and solutions, as evident in its subscription services revenue retention rates (119%), last reported in FY2022.

Valuation of VEEV

With the management’s guidance in mind, I noted a slowdown in sales growth in FY2024 due to VEEV implementation of standardising termination for convenience (TFC) rights creating some headwinds in the near term. The operating margin for FY2024 is likely to decrease, owing to higher investments in R&D, hiring and stock-based compensations.

For the DCF model, I inputted a terminal growth rate of 3% and WACC of 8.7% for the perpetuity growth method leading to a 44% downside at the current share price. For the exit multiple, I used Aswath Damodaran’s industry metrics for the healthcare information technology sector of 20x and derived a 9% downside.

Next, for comparables, I chose VEEV’s primary competitor – IQVIA Holdings, a company that also offers technology solutions for healthcare and clinical research of similar market capitalisation, and other healthcare technology peers. While Salesforce and Oracle cater to a broader market beyond the life sciences industry, they too offer cloud platforms and CRM solutions for their customers.

As summarised by the football field chart, VEEV’s valuation falls below the current share price, leaving minimal margin of safety. From recent stock performance, we can see that potential gains were realised in H1 2023, as VEEV is up 21% YTD. In addition, FY2024 might be a less-than-exceptional year for VEEV for both the top and bottom line, for the reasons mentioned above. This results in a lower implied share price range for EV/Sales and EV/EBITDA multiples.

Risks and Uncertainties

VEEV’s decision to migrate its CRM applications from the Salesforce platform to its own Veeva Vault platform could go either way and have far-reaching effects on revenue, with Salesforce accounting for 30% of subscriptions services revenue. According to the 10K report, the existing agreement till 2025 outlines that Salesforce will not develop or promote applications directly competitive to the Veeva CRM. Management’s timeline is for early adopters to have access to Veeva Vault in 2024, and 2025 for all customers, or by Sep 2030 if the process is unsuccessful.

In the worst-case scenario, Salesforce may develop a product after the agreement ends that competes directly or indirectly with VEEV and VEEV’s customers may be inclined to switch to a competitor, such as IQVIA, based on the Salesforce platform or to build their own custom solutions on the Salesforce platform. Therefore, in the near term, VEEV’s revenue growth is dependent on the success and efficiency of this migration.

Next, a caveat to VEEV’s wide economic moat mentioned above is the concentration of sales in VEEV’s key clients. The top 10 customers accounted for 36%, 31% and 29% of VEEV’s revenue in FY2021, 2022 and 2023 respectively. These customers help to solidify VEEV’s reputation as a trusted and recommended solutions provider that they could significantly affect the company’s revenue growth and the onboarding of prospective customers, should they decide to terminate VEEV’s services.

Lastly, VEEV’s business is heavily reliant on sales to customers in the life sciences industry. While positive growth is expected in the near future, certain headwinds may dampen the demand for VEEV’s solutions – from the regulatory, political and economic uncertainties to the dealmaking environment in life sciences.

Conclusion: Next Few Years Crucial For VEEV

VEEV has displayed impressive financial figures for a young HCIT business targeting a recession-proof, non-cyclical industry. The premium over the current share price may be justified by its wide economic moats and potential to strengthen its position as a market leader. However, I am cautious about the near-term outlook for VEEV as it seeks a pivotal move away from the Salesforce platform which has been integral to its development thus far. The next 2 years will be crucial to see how VEEV continues to innovate cloud solutions on its own and stay ahead of the competition.