Veeva Systems: During our second quarter portfolio update, we profiled portfolio holding, Veeva Systems Inc. (VEEV). Below is a replay of our live commentary on the company from our quarterly portfolio update WEBINAR and an excerpt from our QUARTERLY LETTER.

Ensemble has recently taken a position in Veeva Systems, which we believe is expanding its lead in the life sciences software market. As pharma, biotech, medtech and contract research organization (CRO) companies buy more of Veeva’s applications that tie together on its cloud-based Vault platform, the more efficient and stickier those customers become. We expect this to fuel above-average growth in revenue and profits for Veeva over the next decade.

Founded in 2007, Veeva started by selling customer relationship management (CRM) software designed to meet the complex processes and regulatory requirements of pharma companies like Pfizer and Merck. Veeva’s CRM was built on the Salesforce cloud-based platform — Veeva’s CEO was previously the SVP of Tech at Salesforce — and Veeva’s CRM was quickly adopted when the iPad was released in the 2010s. Pharma sales reps could use Veeva’s CRM on tablets to track and facilitate their interactions at doctors’ offices. By 2012, Veeva had over 80% share for its CRM.

Although Veeva’s CRM has the most market share in life sciences, its CRM suite is now only about one-quarter of Veeva’s total revenue as it has successfully upsold other applications. CRM is within Veeva’s Commercial Solutions segment (50% of fiscal 2024 revenue) that is growing single digits annually. Aiding growth is software like PromoMats to create and distribute marketing content, and its datasets like Compass transaction data on patients and prescribers and national projection data, which companies use to target customers like doctors.

In 2012, Veeva launched its own Vault platform on which its software in the R&D Solutions segment (50% of fiscal 2024 revenue) is built. R&D Solutions target the development side of life sciences firms, and its subscription software sales are growing at a double-digit pace while replacing legacy and fragmented solutions that don’t “talk well” to each other, and even paper. Switching to one of Veeva’s modern applications can result in a 30%-40% cheaper total cost of ownership versus a legacy solution. An executive of a large pharma company described Veeva as having the potential to become the Microsoft Office of clinical operations, replacing outdated software the equivalent of WordPad – not even Word!

Top selling R&D Solutions applications include Vault QualityDocs for document management related to quality and manufacturing records, Vault Submissions for regulatory documents, and Vault eTMF (electronic trial master file) software that stores essential documents for clinical trials. Veeva is also pushing further into clinical trial management system (CTMS) software that manages the logistics of a trial, and electronic data capture (EDC) software that collects data from a trial. There is a lot of opportunity for growth as Veeva goes deeper into clinical trials. Clinical trials are becoming more digital and decentralized, which increases their efficiency and the number of eligible participants since it can lessen the need to be near a physical site.

Life sciences companies face an imperative to boost efficiency. Eroom’s Law shows that since 1950 there has been a long-term decline in the number of FDA-approved drugs per billions of R&D dollars spent. Eroom is the clever backward spelling of the much more productive Moore’s Law in the semiconductor industry. And while software alone can’t reverse life sciences’ fall in productivity, it can help.

The broad adoption of Veeva’s software reflects customers’ need to be more efficient. Veeva has over 1,400 customers and its software has been used by 47 of the top 50 biopharma companies like Ely Lilly, emerging biotechs like Replimune, medical device firms like Boston Scientific, and CROs like ICON that run outsourced clinical trials. Its revenue has become more diversified as a result, with the top 10 customers accounting for 28% of revenue in fiscal 2024, down from 61% in fiscal 2012. It has also expanded internationally with 59% of revenue from North America, 28% Europe and Other, 11% Asia Pacific, and 3% the Rest of World in fiscal 2024.

The majority, 94%, of Veeva’s revenue comes from biopharma customers, 4% medtech and 2% consumer products as of fiscal 2q24. Of its biopharma revenue, 66% comes from large enterprises, 25% small medium businesses (SMBs), 4% emerging biotechs and 5% CROs. While Veeva counts most large biopharma companies as its customers, it has many more products left to sell them, and further to penetrate SMBs and emerging biotechs. Veeva recently launched Vault Basics, a low-cost, easy-to-deploy software package that offers smaller companies a chance to expand.

Contributing to Veeva’s success is its distinct corporate culture reflected in its decision to convert to a public benefit corporation (PBC) — the first public company to do so in 2021. Being a PBC gives Veeva legal runway to consider the interests of customers, employees, and communities, alongside the financial interests of shareholders. Veeva says, “As a Public Benefit Corporation, we are guided by our core values — do the right thing, customer success, employee success, and speed — to help the life sciences industry improve health and extend life and to create high-quality jobs that benefit our employees and communities.”

Caring about doing the right thing does not mean Veeva doesn’t care about profits or shareholder returns. In fact, Veeva ranks near the top of public global application software companies by their 3-year average GAAP operating margin, per Bloomberg data, with room to grow. Veeva’s CEO and founder Peter Gassner is also the second largest shareholder – behind only Vanguard, with almost 8% of the shares outstanding worth over $2 billion. We like that he has that amount of skin in the game, alongside us shareholders.

Being a PBC is a competitive edge for Veeva as well, as it signals to customers that they are a priority. This is important in life sciences where customers put sensitive information into Veeva’s software and may use it for decades.

Another edge for Veeva is that its key competitors are not focused on life sciences software. Top rival Medidata was acquired in 2019 by the French company Dassault Systèmes, more known for its engineering software for manufacturers of products like airplanes and cars. Oracle is gigantic and sells software to many different industries. IQVIA is focused on the life sciences industry but is not known as a software developer. IQVIA was formed in 2016 by the merger of Quintiles, a CRO, and IMS Health – the largest provider of US physician prescription data.

IQVIA sells CRM software that is built on the Salesforce platform, like Veeva’s original CRM. In April 2024, Salesforce and IQVIA announced a deeper partnership to co-market a new CRM and other life sciences software based on Salesforce’s platform and IQVIA’s expertise and data. This was preceded by Veeva announcing in 2022 that it would move its CRM off Salesforce onto Veeva’s own Vault platform. Veeva launched its Vault CRM for general availability in April 2024 and will convert existing CRM customers to Vault through 2030. Having its CRM on the Vault platform will enable more innovation and better data flow between Veeva’s Commercial and R&D Solutions software.

We believe Salesforce is seeking to replace the royalty revenue it will lose from Veeva in launching its Pharma CRM with IQVIA — right after Veeva’s exclusive 10-year contract with Salesforce ends in September 2025. Salesforce also announced general availability of its Life Sciences Cloud including applications for clinical operations in June 2024. We are skeptical of Salesforce’s success in life sciences given their lack of focus on the industry. IQVIA doesn’t have much to lose since its existing CRM with Salesforce, released in 2017, has already failed to significantly dent Veeva’s dominant market share.

In addition to key competitors Medidata/Dassault, Oracle, IQVIA and potentially Salesforce, there are many other point solution vendors far behind Veeva in developing a suite of integrated software. And the greater the number of products Veeva’s customers adopt over time, the wider its moat grows. The more needs that can be met by one vendor with multiple applications, the more effective the solution is to a customer.

Veeva’s platform strategy has been unfolding for more than a decade since it launched Vault in 2012. As it progresses, a successful platform strategy reduces the incremental effort and cost to upsell. Although Veeva aims to sell best-of-breed software, at some point the customer purchasing decision becomes as much about easy integration and not having to deal with too many vendors. This becomes a barrier to entry for competition. Evidence of Veeva’s success at upselling software can be seen in the fact that customers of Veeva’s Commercial Solutions own a rising 4 products on average, and in its R&D segment, 3 products on average. Veeva has over 40 products to upsell.

There is often concern with vertical software companies like Veeva that focus on one industry or end-market, that they don’t have as big a total addressable market (TAM) as horizontal software. Horizontal software firms like Microsoft can sell Office to almost every industry that exists. And while a vertical focus does limit Veeva’s total market size, we are satisfied it has a long runway for growth. Veeva has already increased its total addressable market (TAM) from $5 Billion when it IPO’d in 2013 to $20 billion.

Veeva calculates its TAM at $20 billion — 1% of the $2 trillion in life sciences revenue that’s growing at a 6% compound annual growth rate (CAGR.) At $2.4 billion in revenue in fiscal 2024, Veeva has penetrated only 12% of its TAM. The 1% of life sciences revenue used to calculate TAM could also go higher, as the industry adopts more technology.

Despite the above positives, Veeva faces some headwinds that have created opportunity in the stock. Among them is weaker spending by biopharma companies. In the last couple years, spending has been impacted by uncertainty related to the US Inflation Reduction Act (IRA)’s changes to Medicare pricing and a slowdown in clinical study starts after the initial wave of Covid-19, along with other issues. The headwinds have primarily hurt Veeva’s professional services revenue that is 20% of total and that is more discretionary but have also delayed some deals for Veeva’s subscription software (80% of revenue.)

In its most recent quarter, Veeva also talked about the effect of artificial intelligence. Customers are evaluating how pricey new AI services might impact their IT budgets. The AI impact is not exclusive to Veeva as many enterprise software stocks were also at least partly hit on this issue around the same time. A pullback in spending due to customers’ reconfiguring their budgets for AI, however, is likely temporary for Veeva given its software is mission critical. And Veeva should be an outsized beneficiary of AI longer-term. Given the importance of accuracy, Veeva has positioned itself as the source of truth for life sciences data that customers and partners can leverage. This is a valuable spot to be in. And with the launch of its DirectDataAPI in April 2024 for its Vault platform Veeva says customers and partners can access its data 100x faster than normal. In fact, advances in AI are likely to make the data stored in Veeva’s systems even more valuable.

Despite the various pressures on its customers’ spending, they still need to increase their productivity and to drive revenue. Exciting areas in medicine like gene therapies, RNA drugs and complex biologics are set to unleash a new wave of treatments for cancer, and rare and infectious diseases. And with the cost of a successful clinical trial often in the hundreds of millions of dollars, getting such innovations faster to approval and more effectively to market can translate into tens of millions of dollars to the customer.

The adoption of integrated, cloud-native software is also still early in life sciences. As a manager at Becton, Dickinson & Co. (BD), a maker of medical devices like syringes and stents, and a customer of Veeva said: “We are working towards unifying our R&D systems. We are not quite there yet. Its definitely an end goal that really goes into our BD 2025 strategy to simplify, right, and to reduce complexity. . . A key piece to running clinical trials right is the ability to reduce time to market, and to really get the products and solutions to patients as quickly as possible. Being able to unify our clinical systems, all of our R&D technologies, is really going to help be a focal point in being able to advance our products and get them to market a bit quicker.”

In conclusion, while life sciences companies face various near term headwinds, this may only create pent-up demand for Veeva’s software that helps customers be more efficient, reduce costs, and bring their therapies and medical devices faster and more effectively to market, necessary to fuel sales. And while Veeva faces existing and new competitors, its moat expands each day its customers adopt more of its software on the Vault platform.

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