Veeva: CRM For Lifesciences Has Been A Very Lucrative Niche – Veeva Systems Inc. (NYSE:VEEV)

Veeva (NYSE:VEEV) has led the development of cloud-based compliance and software solutions for the growing life sciences industry. The business has 2 main products, Veeva Commercial Cloud and Veeva Vault. Commercial Cloud is Veeva’s legacy business and provides features to customers including customer relationship management (“CRM”). Veeva Vault, provides document and content hosting and management. Veeva has a market capitalization of almost $21B, and will generate more than $1.0B in annual revenue over the next 12 months. The company’s products are especially important to maintain regulatory compliance yet also allow more active collaboration and marketing to customers and prospects. Veeva has delivered strong investor returns over the last 5 years of nearly 38% p.a. over this period.

Veeva has been a core holding of the Sustainable Growth portfolio.

Investment Thesis

Critical Software in a growing market

Veeva has managed to make significant headway by providing mission-critical software in the growing Lifesciences industry. The unique value proposition that Veeva has developed is the ability to assist life sciences businesses in proactive customer marketing and development of sales relationships while ensuring strict compliance with the extensive regulatory regime that the industry faces. Veeva’s dominance in the life sciences industry is so complete that it counts over 800 customers market and has over 80% market share for software applications within the life sciences vertical. Veeva’s customer list read like the ‘Who’s Who’ of the pharmaceutical and biotechnology industries and includes customers such as Abbott (NYSE:ABT), Amgen (NASDAQ:AMGN), Bayer (OTCPK:BAYRY), GSK (NYSE:GSK), AstraZeneca (NYSE:AZN).

Veeva Commercial Cloud is the legacy CRM product that helps life sciences businesses proactively market and drive customer penetration while ensuring strict compliance with regulatory requirements in terms of product disclosures and commission structures/incentive payments to resellers. This business accounts for approximately 50% of Veeva’s revenues. The faster-growing segment of Veeva‘s business is Veeva Vault, which helps life sciences companies manage the process of drug development and commercialization. Vault is currently 50% of revenues. This product helps in the documentation and timeline management of the clinical trials process, fostering collaboration across relevant stakeholders to ensure needed approvals and to work through timelines. The platform also manages document quality control, something that’s a critical piece of the regulatory approval process.

Sticky, Moaty service

Veeva has managed to create a lot of the sustainable competitive advantages that Salesforce (NYSE:CRM) itself possesses. Customer management is a mission-critical activity for any life-sciences business, thus Veeva with a best-of-breed product for the life sciences industry has created a wedge from which to expand into other services. The loss of productivity involved in switching to a new CRM management system is potentially high as they ramp up on alternative platforms. Prior to Veeva’s entry into the market, CRM systems were often custom legacy implementations of ERP for the life sciences industry which wouldn’t scale.

Having established such a dominant market share in the life science vertical with a core, sticky application, Veeva is now able to introduce additional software for the life sciences industry, benefiting from a network effect in terms of learning and product development across hundreds of similar customers and being able to provide a more valued product with greater utility than a custom implementation would. The success of this can be seen in Veeva’s module adoption numbers, with the number of commercial cloud products per customer steadily increasing

Source: Veeva JPMC Healthcare conference, 2020.

Further, with in-depth expertise within the life sciences industry, customers have a much higher probability of compliance with relevant regulatory requirements than would be possible in custom implementations which would likely be at greater expense and take more time. It is no surprise that retention of customers is very high. Through expansion of its product offerings with products such as Veeva cloud, Veeva is increasing its lock on a given customer by facilitating cross collaboration across different business units. Selling additional software licenses across the different parts of the business, not only increases revenues for Veeva, but also ensures that the move to another system will bring maximum pain and loss of productivity to multiple business unit owners across an enterprise.

Opportunity for expansion and growth

I believe that Veeva has a long-term market opportunity to dominate the software needs of the life sciences vertical. Veeva’s growth path will continue to be selling additional software applications and capabilities into the life sciences market. I don’t believe that it’s out of the question that Veeva could soon come out with an analytics module tying in marketing and sales pipeline in a similar fashion to what Salesforce has done. Veeva’s recent acquisition of Crossix does suggest a more concerted focus on providing deeper and richer customer marketing insights and capabilities for healthcare customers as a monetizable service.

In addition to cross-selling more to its existing life science customers, I expect that Veeva will also gain significant traction in other verticals that have very specific regulatory needs and requirements. Energy, utilities and chemicals are all businesses and industry segments with heavy regulatory oversight and a requirement to ensure sales and marketing compliance in a similar manner as life sciences. Veeva is already taking some initial steps to penetrate adjacent verticals.

Veeva itself sees a $10B TAM, of which $1B is outside its core life sciences market, implying that Veeva has barely scratched the surface today, with only $1B in revenue today.

Financial Summary

Veeva has been growing revenues at an annualized rate of 28% over the last three years. In its most recently reported quarterly results, the business grew revenue at approximately 25% year-over-year. I am very interested in businesses that are not only high growth in terms of revenue but are financially disciplined as far as cash conversion and returns on invested capital. Veeva ticks both of these boxes and sports return on invested capital of greater than 20%. With a plethora of long run opportunities including additional software applications into its core life science market and expansion into adjacent industries this bodes well for shareholder wealth creation. Veeva does a great job at cash flow conversion, converting north of 30% of revenue into cash flow from operations and ultimately free cash flow.

Veeva’s financial profile has been steadily improving as it builds scale in the business and has been effectively cross-selling multiple solutions into existing customers, improving its sales force effectiveness. Veeva has steadily improved gross margins from 52% in 2013 to 73% today, with net margins more than doubling over the same period, increasing from 14% to near 30% today. Continued margin expansion is likely, with additional scale in the businesses and further penetration of other modules to existing customers.

Valuation

Veeva trades at a forward PE of 57 x earnings and a price to sales ratio of approximately 20 x sales. While the PE ratio may seem pricey, the nature of SaaS businesses is that customer acquisition costs are expensed upfront with revenue earned over the life of the customer so such a high PE isn’t unusual. On a P/E basis, Veeva trades roughly in line with where it has traded over the last 5 years. I expect Veeva will be able to sustain long-term revenue growth rates of greater than 20% revenue and returns on invested capital of almost 20%. This is something that the company itself evidently believes is achievable, having set a revenue target of $3B in 2025.

Source: Veeva JPMC Healthcare conference, 2020

Should Veeva continue to grow earnings at rates above 35%, then I believe it is likely that the business will be able to keep an earnings multiple close to where it trades today, and deliver solid double-digit returns to shareholders over the next few years.

Concluding Thoughts

Veeva is an exceptionally high quality software business within the life sciences vertical. It provides a range of mission-critical applications for the vertical. Its financial discipline is excellent, with strong revenue growth and good returns on invested capital and exceptional free cash flow conversion. Long-term growth opportunities also appear abundant.

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Disclosure: I am/we are long VEEV, CRM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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