There is a large and growing demand for cloud-based software in the life sciences industry, and the company we review in this report is the clear market leader (with a lot of long-term upside). And despite a recent earnings beat and guidance raise (on top of its already rapidly growing business) the shares have recently sold off (as part of the broader market’s recent sell off of top growth stocks in general). We believe these factors have combined to create an attractive buying opportunity, and we share all the details in this report, including a review of the business, growth prospects, valuation and risks. If you are a long-term investor, these shares are worth considering for a spot in your portfolio.

VEEV price chart (as of 3/16 closing price). source: YCharts

Overview: Veeva Systems (VEEV)

Veeva Systems Inc. (VEEV) provides cloud-based software solutions for the life sciences industry. The solutions address the operating and regulatory requirements of many company’s most strategic business functions (ranging from research and development (R&D) to commercialization). Veeva’s cloud solutions are grouped into:

Commercial Cloud (49% of FY21 revenues): is a suite of customer relationship management (CRM) applications that helps life science companies achieve better, more intelligent engagement with healthcare professionals and healthcare organizations, while ensuring regulatory compliance. Also, Veeva is utilizing the Data Platform of Crossix, a provider of privacy-safe patient data and data analytics which it acquired in November 2019, to build the Veeva Data Cloud, a longitudinal patient and prescriber data offering.

Vault (51% of FY21 revenues): is a unified suite of enterprise content and data management applications built on the proprietary Veeva Vault Platform. It addresses the content management requirements for Veeva’s customer’s commercial and R&D functions. Based on functionality, the applications are organized into two product areas: Commercial Content Management and Development Cloud.

Veeva has a global presence, yet North America is its largest operating geography (accounting for over half of its total revenues). It was founded in 2007 by Peter Gassner, a former salesforce.com executive who still runs the company successfully.

Recently, Veeva became a Public Benefit Corporation (PBC), by virtue of which it will remain a for-profit corporation but will legally be responsible to balance the interests of multiple stakeholders, including customers, employees, partners and shareholders.

Broad, Innovative Product Portfolio; Expanding TAM

Veeva has been at the forefront of creating life-science industry-specific transformative cloud software solutions that help companies streamline drug development and move to a digital-first commercial model. Despite being a market leader, Veeva has continuously strived to enhance its product capabilities and broaden its portfolio to extend its leadership position and to set itself up for long-term growth. As a result, Veeva today boasts of an innovative portfolio that includes a wide array of solutions to address multiple processes within the life science industry.

The company was launched in 2007 as a provider of pharma CRM software that was essentially built on the premise of the salesforce.com CRM software, and catered to a small, niche market worth $500 million. It spent the next few years developing other cloud-based solutions targeted toward the entire spectrum of the life science industry including pharma, biotech, med-tech, as well as contract research organizations (CROs). For example, in 2012 it launched Veeva Vault, the first cloud-based content management applications suite for the life science industry. This expanded its addressable market opportunity by as much as ten times in a short span of six years.

More recently, in 2020 Veeva launched its first Consumer applications, MyVeeva for Patients and MyVeeva for Doctors. These applications ease the burden of clinical trials and make study execution easier. The company also announced the Veeva Data Cloud in March 2020 to support the life science industry by delivering greater innovation and choice to the data market (the offering has been progressing well, and patient data for the US was released in the fourth quarter of FY2021—it already has five early adopter customers). Veeva expects to have prescribers and sales data available for the US by the end of the year, and release the offering in additional countries over time. The Data Cloud represents a significantly large potential market opportunity for Veeva as this area of the life sciences market has remained stagnant for too long. Additionally, Veeva is expanding its offerings to other industries with similar regulations, protocols and procedures, such as consumer goods, chemicals and cosmetics. All of these together have resulted in further expansion of Veeva’s addressable markets, which are now estimated to be worth over $12 billion.

Importantly, Veeva’s addressable markets are still nascent and there is a lot of whitespace remaining, thus providing it with a significantly large growth runway. Moreover, the company has demonstrated its strong ability to innovate and has a deep product pipeline, which we believe will enable it to not only capture a larger market share, but also expand its addressable markets.

Robust Operational and Financial Performance

The breadth of Veeva’s offerings has helped the company build important customer relationships with a growing number of life science players. Many elite names such as AstraZeneca, Bayer, Eli Lilly, GSK, Merck, Novartis, Pfizer, and others (as well as six of the top seven contract research organizations (CROs)), have adopted Veeva’s solutions in order to drive efficiencies and stay competitive. This has helped Veeva deliver tremendous operating and financial performance over the years.

In the recently concluded fiscal year (in January 2021), Veeva’s customer base grew to 993 (from 861 in FY2020). Commercial Cloud customers stood at 432 at the end of the fiscal year (versus 390 at the end of FY2020), and was largely driven by its core CRM offering (and also the solid adoption of Veeva CRM Engage, for which customers have been moving to paid subscriptions through the end of the 2023 period). Veeva expects high attachment rates with new customers for CRM Engage as they look for digital capabilities to drive field efficiency. Veeva Vault customers grew from 715 at the end of FY2020 to 852 at the end of FY2021 as a number of new customers adopted Vault applications across the clinical, quality, regulatory and safety areas.

Revenues continue to grow rapidly (strong double digits historically), and the company continues to maintain its historical growth trajectory in FY2021 (with revenue growth of 33% y/y to $1.47 billion). Subscription revenues makes up ~80% of the total revenues and grew by 32% y/y to $1.18 billion.

The company also maintains a high subscription revenue retention rate (124% in FY2021), which indicates the high level of customer satisfaction and showcases Veeva’s ability to not only retain, but also grow within its existing customers. Also, the high percentage of subscription revenues provide a significant level of revenue visibility, going forward.

With regards to bookings, Veeva posted a record number of Commercial Cloud bookings during FY2021, with particular strength in Veeva CRM Engage. The Development Cloud also saw a record number of bookings fueled by widespread momentum. This led to calculated billings of $1.6 billion for the year, up 34% y/y.

Going forward, Veeva expects its FY2022 total revenues to grow by ~20% to $1.755-$1.765 billion, and subscription revenues to grow by ~21% to ~$1.43 billion, with a major portion of the subscription revenue growth expected to come from the Vault product line. While the revenue growth rate is expected to slow down in FY2022, we note that the expected growth is off a much higher base and hence find the ~20% growth as highly attractive.

Source: FY2021 Presentation, Investor Day 2020 Presentation

On the profitability front, Veeva’s non-GAAP gross margins have expanded considerably from just over 70% a few years back to ~75% today, primarily driven by expansion of subscription gross margins, which presently track at over 85%. Non-GAAP operating margins have also expanded significantly from 31.9% in FY2018 to 39.8% in FY2021 as the company has benefited from significant OPEX leverage.

Going forward, in FY2022 Veeva expects its non-GAAP operating margins to be marginally lower at ~37% as it continues to invest heavily in new products and also in sales & marketing and general & administrative areas, while still generating leverage in R&D expenditure.

Targeting Continued Double-Digit Growth for the Next 5 Years

Veeva is targeting $3 billion in annual run-rate revenue by 2025, with $1 billion expected to come from Commercial Cloud and $2 billion from Vault. This roughly represents over 20% growth in each year through 2025 (on the initial base of $1.1 billion revenue for FY2020). Given the company’s history of meeting the targets well in advance (and its current growth trajectory), we believe Veeva will likely surpass these targets.

Generating Solid Cash Flows to Fund the Growth Internally

Veeva’s operational cash flows have also grown significantly over the years. The company generated $551 million (including $81 million in excess tax benefits) from its operations and $543 million in free cash flows in the recent fiscal year and expects to generate $635 million next fiscal year.

The tremendous amount of free cash flow generation has culminated into a solid cash position of $1.66 billion for the company on a very strong, debt-free balance sheet. This provides Veeva a lot of capital cushion to continue to invest in growth opportunities via further broadening its portfolio through R&D innovation, and also through complementary acquisitions.

Valuation

Veeva may look expensive on a price-to-sales basis, however we believe the high growth trajectory justifies the price and most Wall Street analysts agree (especially after the recent price pullback). First, here is a look at the company’s historical price-to-sales ratio, and the recent price pullback provides some margin on safety (although the shares are by no means cheap)

Nonetheless, it is the high growth rate (18.8% revenue growth expectation for the next year, per StockRover), large total addressable market, leadership positon and very high subscription renewal rate (well above 100% due to “land and expand”) that make the business and the shares attractive.

Even on a comparative basis, its direct peer IQVIA trades at a much lower TTM P/S of 3.2x. However, we believe Veeva’s expanding TAM, market leading positioning, robust growth, stable profit margins and high cash flows justify the rich valuation.

Moreover, the street has a positive outlook on the stock, as the majority of Wall Street analysts covering it are bullish and have a consensus price target of $324.87, which represents ~27% upside potential in the relatively near future (and we believe a lot more in the long-term).

Risks

Revenue Concentration: Although Veeva has a large and growing customer base, its revenues are relatively concentrated with a small number of key customers. For perspective, the top 10 customers account for over a third of its total revenues. The loss of one or more of such key customers can have a negative impact on the company’s revenue growth rates.

Dependency on Third-Party Infrastructure Providers: Veeva’s solutions are hosted from and use computing infrastructure provided by third parties, including salesforce.com (for CRM applications) and Amazon Web Services (for Vault applications, Network applications and certain other Commercial Cloud applications). Should a need to transition to a new provider arise, Veeva may have to incur significant costs and could experiuence service interruptions.

Risk of becoming salesforce.com’s Acquisition Target: Since Veeva relies heavily on its agreement with salesforce.com (set to expire on September 1, 2025) to use the Salesforce1 Platform for the Veeva CRM applications, there is an outside chance that salesforce.com might try to acquire Veeva to drive its top-line. It is a well-known fact that salesforce.com is relying heavily on expensive acquisitions for growth (had recently acquired Slack for ~$28 billion), and Veeva being heavily dependent on salesforce.com’s infrastructure, might become one of its soft acquisition targets.

Competition: While Veeva does not have any competitor apart from IQVIA for cloud applications geared toward the life sciences industry, it does face competition for its Vault application from a number of players offering similar products (albeit fragmented), including from IQVIA, Medidata Solutions (acquired by Dassault Systèmes), OpenText, Oracle and other smaller providers.

Conclusion

Veeva is at the forefront of transformative cloud software solutions in the life sciences industry. It enjoys an early mover advantage and already has an envious list of customers (including many of the world’s largest pharma companies, top CROs, and up and coming biotech companies). Further, Veeva has a greater than 100% customer retention ratio (“land-and-expand”), and it also continues to grow its customer list.

Additionally, Veeva continues to deliver very strong financial performance (year after year) thanks to its stable profitability, robust free cash flows and debt-free balance sheet. Moreover, it has a deep product pipeline and expanding total addressable market (thanks to its expansion into other industries such as consumer goods, chemicals and cosmetics). And from a valuation standpoint, we believe the healthy price-to-sales ratio is justified considering the company’s leadership position and powerful long-term growth opportunities.

If your are looking to add some powerful long-term growth to your investment portfolio (especially on this recent price pullback), Veeva shares are absolutely worth considering.

Life Sciences Cloud Software Company: Even More Attractive on the Recent Price Pullback