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Medidata Solutions, Inc. (NASDAQ:MDSO)

February 27, 2013 7:15 pm ET

Executives

Tarek A. Sherif - Co-Founder, Chairman and Chief Executive Officer

Cory A. Douglas - Chief Financial Officer and Chief Accounting Officer

Analysts

Andy Kearns

Andy Kearns

Welcome, everybody. My name is Andy Kearns, I run the software banking business for Morgan Stanley, and I'm very pleased to be up on stage here with Tarek Sherif, and Cory Douglas of Medidata. What I thought we'd do is I'll ask some questions, we can open it up to the audience a little bit further into the discussion for other questions.

But maybe just to kick it off, Tarek, for those who may not be familiar with the story, if I can ask you to spend kind of 5 minutes or so just kind of an overview of the business, the opportunity you're going after, and just the profile of the business from a financial standpoint. That would be great.

Tarek A. Sherif

Sure, happy to do it. Thanks, Andy. So Medidata is the largest task provider of solutions to life sciences companies. What we focus on is working with pharmaceutical companies to improve efficiency and productivity in their drug development efforts. More specifically, we focus on replacing paper-based and excel-based and legacy-based processes in drug development in actual clinical trial with a very innovative disruptive technology solution that helps them to both save money, and to drive down times in drug development, which as you know is extraordinarily important in these times given patent expirations.

We're sitting on an enormous opportunity, the company was founded about 13 years ago, very much focused on providing solution to a very specific area of drug development around Data Capture, and management reporting. Over the last 3 or 4 years, we've broadened our platform pretty dramatically and we now focus across the entire drug development spectrum. So from conception of a clinical trial through to completion of that trial, and in line with that, our industry is, sort of reached an interesting inflection point.

So our customers spend $90 billion a year developing new drugs. They haven't had a great deal of success with that, the productivity has been relatively low, and I think over the past decade, you've seen a very painful retrenchment for a lot of the large drug development organizations in terms of running into patent expirations that have had an impact on their revenue growth, safety issues that have come to bear, generic competition and all of that has forced them to refocus how they look at drug development, because it is such a significant factor in both their overall expense structure, and obviously, it has massive implications on their growth -- future growth.

I think as we look at the drug development industry today, it seems to be coming out of that period of retrenchment, with a lot of pharmaceutical companies once again focused on innovation and on growth. And there's an openness to using really advanced cloud-based technology like Medidata's, which has been quite disruptive in our industry over the years to help them to drive that productivity and efficiency.

And so in terms of our overall results, we just released our year end 2012 results, and we've seen a real nice acceleration in our growth, tremendous backlog growth going into 2013 on the order of close to 40%. And that's in part, because we're seeing customers get much more aggressive about replacing legacy infrastructure built by Oracle and by Microsoft, and trying to replace some of the manual processes that they've had historically as well.

I think we have an interesting business model in a sense that we are a vertical SaaS player, and our margin profile is very different from a lot of the horizontals. We were profitable early on. We drive among the best profitability of any of the SaaS peers we have and yet we have, I think, a good story to tell on the growth side as well.

Question-and-Answer Session

Andy Kearns

Terrific. And maybe Cory, just to kind of level set again at the outset here, can you just kind of cover the business model itself? Tarek mentioned kind of the recurring revenue, the recurring nature of the business, but how do you make money?

Cory A. Douglas

Sure. Basically, it's a subscription model in terms of customers having the right to use our technology for a period of time, we drive volume in terms of the adoption of our technology solutions, we recognize revenue on a ratable basis over the contracts short-time, and our strategy is to drive adoption of our technology through our infrastructure, which is highly scalable on a gross margin basis and just continue to drive that and we offer professional services, which we help our customers adopt our technology solutions in an efficient manner. So if you look at our financial statements, you'll see that we've reached a critical mass as a SaaS company, so we're able to drive the profitability that Tarek mentioned, on a gross profit level, it allows us to have enough capital to reinvestment business to drive future growth.

Andy Kearns

And that's a great segue, because I want to get in to the investment that you've made in the business and yours is a unique story in the acceleration of growth at the scale you have. And so can you talk, Tarek, about some of the investments you've been making and the returns you've been getting on those investments over the last 12 months.

Tarek A. Sherif

Sure. I think the return is quite -- it's become quite obvious. We've seen it in terms of the -- in the second half of last year, our growth rates accelerated to north of 20%. Our backlog -- we provide, always, 1 year out backlog. So at the end of last year, we provided backlog for 2013 as I said before, that grew about 38%, which implies for 2013 low- to mid-20% revenue growth, which is up significantly from the year before and the year before that. The investments we've been making have been focused in 2 areas -- actually, 3 areas, but primarily, around sales and marketing where we've expanded the team and effectively, upgraded it as well, because the kind of solution we're selling today, which is much more of a platform, requires us to sell much higher in pharmaceutical organizations than we have been before, and we also are investing a tremendous amount in R&D, and that's a reflection of the opportunity that we see. So we broaden the platform capabilities, feature functionality over the last 3 years, but we see an enormous opportunity on a go-forward basis to drive greater use of the data assets that we have. And so one of the unique things about being a vertical SaaS player, is that we have a tremendous amount of transactional, operational, financial data that we collect from our customers, which we have a right to use on and anonymized basis, and we're starting to use that to inform the various solutions that we have and we think there's a lot more that we could do there. I think that will drive both top line for us, and it will drive stickiness with our customers, particularly, when you look at the replacement of some of the older transactional software like that provided by Oracle.

Andy Kearns

Right. And so just the products, and how the company has evolved from kind of a single product to multi-products to platform-type business, and you talk about the vertical market that you're going after around pharmaceuticals and kind of the clinical development management business. So can you talk a little bit about the penetration of the customer base, how you view the sales motion with that in customer base, and how you expect to continue to grow, and then circle back to kind of the addressable market and how you think about that.

Tarek A. Sherif

Yes, absolutely. So as we look at our growth drivers going forward, we're taking market share from some of the incumbents, or the legacy solutions. We are -- last year, we added 100 new customers. We have 350 customers currently. There are over 2,000 companies globally that develop drugs. So there's a wide open field for us to continue to add new names. But the second big growth driver for us is the incremental -- the upsell or cross sell, and that really started to kick in for us last year. So if you look at the overall sales efficiency, last year, 25% of our new sales were for non-core products so the newer generation of products for us, and we think that, that layer-on effect is something that's going to continue on for quite some time. The platform sale for us is really interesting. We did our first deal last year and it was over $100 million in value over multiple years with a large pharma company. And if you look at the breakdown of the overall components, 70% of it was newer products and 30% was legacy product. If you look at our current revenue breakdown, only 14% of our revenues are coming from new products, though they're growing at well over 140%. Our customer spend, as I said before, about $90 billion a year developing new drugs, a lot of that is paying the doctors, paying folks who are doing manual processes. I would say in terms of the TAM that we address, it's got to be north of about $6 billion. But arguably, over the longer-term, I think we addressed a significantly greater portion of that $90 billion.

Andy Kearns

And you had mentioned, Cory, the data part of the story, and as you think about the business model, kind of moving forward -- I don't know if this is a question for you, Tarek, or for Cory. Just how do you see the monetization of that opportunity across the different products you sell, and then kind of layering in the data and analytics, insight that you can bring to bear for your customers? Do you see that changing in any way relative to what you do today?

Cory A. Douglas

I'll talk to this one on a macro basis about our model now, I'll let Tarek talk about specifics of data. But one way to think about this is, Tarek mentioned we added 100 new customers this year. Our model has been traditionally to get a customer in, they try out our technology solutions and we, over time, we were able to upsell them and cross sell them. So a vast majority of our revenue growth comes from incumbent customers. And so the data -- our data strategy is going to fit right into that strategy of continually able to, well -- to drive value to our customer -- existing customer base. The other metric you should also pay attention to is that once we get a customer in, we are very sticky, and so we have really outstanding retention metrics. Last year, our retention was in the high-90% range and that's not even counting the upsell opportunity we had with those customers. Besides, as it relates to infusing our data solutions into our existing customer base, I'll turn it over to Tarek.

Tarek A. Sherif

I was going to say, you're doing well there, Cory. Why stop? You were on a roll. But I think that is the big opportunity for us, because in our core market, we have over 50% market share now, and that means we achieved a critical mass in terms of the kind of data that we're collecting, that operational data. In some cases, our customers are giving us access to the clinical data as well on an anonymize basis. And the insights we can draw from that are tremendously valuable for how our customers run their operations, how they think across, or laterally, across the various drug development efforts that they have and we see that as the future of drug development. At the end of the day, the goal we've always had as an organization, mission we had from Day 1, was to improve sort of patient lives, is to get drugs to market in a way that's much more efficient, that's much safer. We're starting to realize that mission, given the scale that we have in the industry, given the trends that are going on in the industry.

Andy Kearns

And one of the things we are talking about, just prior to this session, was just the notion that the cloud or the SaaS -- the delivery models are not only allowing companies to disrupt the incumbent landscape, but to also enable newer functionality that you just couldn't do, given prior architectures. Can you elaborate a little bit on that, kind of aspect of the business? And I think it kind of ties back to barriers to entry.

Tarek A. Sherif

Yes, absolutely. So the historical model, where it was an on-prem software that was focused on just doing the transactions, didn't really retain any of the data assets. I think there were certainly utility to that 1 decade ago or so, but the cloud model is we host everything that we build, we have access to all of that data in a very homogenized form. And because it's homogenized, we can start to get insights looking at that data. Because one of the biggest issues that pharma has is that they have a lot of different data sources coming at them from a lot of different technologies and it's very hard to get any -- to dig deep into that data to get any kind of insight. And that's something that we've started to do. I'll give you an example of it. One of the biggest costs in drug development is around monitoring. Monitoring means -- and that's about $18 billion out of that $90 billion spend. That's when you send folks out into the field to go to a doctor's office to make sure that as they're involved in this clinical trial, they're doing all the right things with their patients, it's to make sure that the data that's in the patient chart matches the data that you're collecting, and it's a huge expense item. And historically, the approach that pharma has taken is they basically done forensic audits, so they sent out an auditor, a monitor, to a site, and they look at 100% of the data points. They make sure that every data point matches perfectly. There's no distinction between, which are the more important data points that you want to look at, and there's no distinction made between which doctor may be doing well and which doctor may not be doing well in the clinical trial. So one of the things that we're already delivering to our customer, looks at site quality, how well is this investigator doing relative to his peers in this clinical trial? Is he getting his data in early or late? Are there a lot of errors in the data that they're putting in? Is the data, perhaps, too perfect? Should it not look the way it does? And do I need to send a monitor to that site earlier to make sure that I don't run into a problem later on? One of the things -- one of the most significant reasons for delays in a clinical trial has to do with your ability to bring patients into the trial, but then for a doctor to continue to get the right data and do it in a timely manner and so what we're trying to do is make that process a bit more efficient.

Andy Kearns

Right. And so as you guys are doing that, and kind of a view that is kind of providing a competitive weapon, if you will, through the technology that you're delivering. How are the competitors reacting? And then do you want to -- can you just address the competitive landscape?

Tarek A. Sherif

Sure. I think, within the industry, it's well known that Oracle is our biggest competitor. They bought a company several years ago that had been our biggest competitor and we've done extremely well in the environment. I think our growth proves that out. The fact that we've had some very high visibility wins. Last year, we announced winning Sanofi, who for a decade, had been an Oracle face forward customer, and there are multiple others out there that we either haven't announced or in the process of moving. So the competitive environment has actually been very favorable for us. I think more importantly though, and that's certainly something to be very pleased with. I think the fact that pharma is now so focused on driving improved productivity and development, is perhaps the biggest tailwind that we're going to have going forward. So if I look at the opportunity that we have, less -- low single-digit customers have started to adopt our platform. So we have a massive ramp ahead of us, and that's why we're investing so heavily in the business now.

Andy Kearns

And let me just -- we've got a big crowd here, so let me just poll the audience to see if there are any questions -- there are the microphones.

Unknown Analyst

Is there any significant difference in the penetration rates of the U.S. headquarter pharma companies and biotech companies versus the rest of the world? Is the rest of the world a few years behind in this trend?

Tarek A. Sherif

The dynamic's shifted. When we first got into the business and we were providing electronic data capture, there was a big difference between adoption rates in the U.S. and EMEA and the APAC. That gap closed, and what we're seeing is that some of the Japanese pharmaceutical companies that we work with, have been quite aggressive about adopting various aspects of our platform, and the same thing's happening in EMEA. So I think that was more true a few years ago than it is today. We're seeing fairly aggressive adoption on a global basis.

Unknown Analyst

[indiscernible] implies there's sort of revenue run rate [indiscernible]?

Tarek A. Sherif

Sure. I'm going to repeat your question just for folks who are listening to the webcast. Is there a minimum size that we work with? And the answer is really no. So I should have said that early on in the description. We work with the largest pharmaceutical companies, but we also work with companies that are running 1 or 2 trials. We work with academic institutions as well. And for each of those organizations, we bring a different kind of value. For some of the smaller organizations, they're very focused on getting to an end point, because that end point may mean more funding, or it may mean that they can sell to their product or sell the company. So they are very much focused on reducing timelines, perhaps even more so than some of the larger companies that have huge portfolios of clinical trials that they're running and for them, the question is how do I -- how do they best balance and manage that big portfolio. But we definitely work with a huge swath or variety of different companies.

Cory A. Douglas

And the incremental cost of adding a new customer is very low.

Tarek A. Sherif

Yes. I think to Cory's point, actually, the incremental cost of adding volume is also extraordinarily low. So if you look at our margins on the software side, they're in the low-80% range. Our overall gross margin has been moving higher, it's going to be about 73% or so this year. The incremental cost of adding volume is -- drives margins that's in the -- that are in the high-90s.

Andy Kearns

We have a question right here in the front.

Unknown Analyst

You mentioned upgrading the sales force, going from a single product to a whole platform, and it's more strategic. Can you talk about where you are in that process? What inning you are, how comfortable you feel, and -- with the sales force now? And is it still an evolving thing?

Tarek A. Sherif

I think given the sales force's performance last year, I have to be fairly comfortable with them. But the reality is, we have a lot more that we can do. We have a lot more opportunity. I'd say we're in middle innings in terms of achieving what we want to achieve, and the sense is that we're now selling into the C-suite, or just below the C-suite versus selling into various roles much lower in the organization. And that does take a different skill set. Some of our folks are -- can be retooled and are being retooled, they're doing a great job. Some need more mentorship, and so one of the things we've been doing is hiring in more folks that are used to be in an environment where you're talking to perhaps, the CIO or the CFO, or the head of R&D of an organization.

Andy Kearns

A question in the back?

Unknown Analyst

Yes. So a year ago, you guys -- $210 million to $215 million, you delivered $218 million. Why was there not more upside potential during the year? So how much is visibility -- and there's a lot of visibility, but was there -- are you limited in how much more you can grow? The range was quite tight and it was really right there.

Tarek A. Sherif

I wouldn't say that we're limited in how much we can grow. I think this year, we're showing, I think very healthy growth. Some of the sales we had last year had a slower ramp, so they had less of -- we take everything ratably, but in some cases, we sign deals that had more of an impact on 2013 than they did on 2012. So there was a very small tail. We're a lot more focused on a longer time horizon. So I'm comfortable with where our backlog ended for 2013. I have good visibility, actually, into 2014 as well, given the kinds of deals we signed last year.

Cory A. Douglas

And then besides, it speaks to the sustainability of our revenue growth. So we don't have -- our model doesn't facilitate a large like bumps, blips in our revenues, it's a pretty steady kind of revenue recognition process. So [indiscernible] on quarter after quarter, or year after year.

Tarek A. Sherif

One way to think about it is, if we signed a lot of -- if there's a lot of volume of business we signed in the second half of the year, it has almost no impact on our overall revenues in that year, where you'll see it is in future years.

Andy Kearns

Another question up front.

Unknown Analyst

Just a question on sort of the revenue per customer, and as you guys sort of transition from the EDC year, EDC model, there's a non-rave model, what might we expect if we were to look at revenue per customer? And maybe you can kind of talk to us about what the ASP is on the EDC side and then ASPs on the non-rave side. So we can kind of just get an understanding of how that might trend over time, as you transition more to non-rave?

Tarek A. Sherif

Sure, absolutely. Let me give you an interesting statistic from last year. When we looked at our deals that were above $100,000 in size, the average selling price increased 44% year-over-year. So versus 2011 to 2012, we saw our ASP go up 44%. And that was primarily a function of us being able to sell additional non-rave product. Longer-term, I think the revenue opportunity is basically, a 3x to 4x increase in revenues on an apples-to-apples comparison. So for every $1 that somebody spent with us on EDC, if they're buying the full platform, they should be spending $3 to $4. Is that helpful?

Unknown Analyst

Yes. Just a follow up, so we haven't really gotten there yet, because if you were to look at sort of revenue per customer, it's sort of flattish, right, to slightly down...

Tarek A. Sherif

Well we added a lot of customers...

Cory A. Douglas

We're always going to add more customers.

Unknown Analyst

So then the follow-up would be, sort of like same-store sales, so to speak, for your customer, I would expect that, that would increase the 3x to 4x...

Tarek A. Sherif

Absolutely.

Cory A. Douglas

Yes, that's the right way to look at it.

Andy Kearns

So we have a couple of more minutes, I think one other question that sits on the minds of a lot of folks here at the conference is just the sequestration, kind of the macro environment. So does the regulatory gridlock have an impact on your customers which might impact you and...

Tarek A. Sherif

I don't think short-term, mid-term, that it has any impact on our business whatsoever. A, because of the way our customers think about drug development. Whether a New Drug Application stalls, in terms of approval or not, doesn't necessarily have a short or midterm impact on their development plans. And secondly, the way we structure our contract, are basically, use it or lose it. So to put it very simplistically, if a customer commits to a certain amount of volume, whether they use that volume in the fixed time period or not, doesn't have a direct impact on us. So one of the big differentiators between ourselves and for instance, the CRO industry is, our backlog is very firm, because we don't get cancellations out of our backlog. It's 99.5% validity of our backlog. But I don't think sequestration is really going to have any impact on our business at all.

Andy Kearns

And how about the macroenvironment, more generally, across the geographies where you're selling?

Tarek A. Sherif

Yes. So last year, actually 2011 was a bit tough for us in EMEA. We continue to grow in Europe, but I think there were some missed opportunities for us. 2012, especially in the second half, came back very strong for us. And I think as we look at 2013, we're very comfortable with all the major geographies that we're in currently. I think it's going to be a good growth year for us.

Unknown Analyst

[indiscernible] escalators in your contracts?

Tarek A. Sherif

So the question was, do we have escalators in our contracts? We absolutely do have escalators in our contracts. We don't always get the escalation that we want. But it's better than going the other direction. But there are also customers that do pay the escalation.

Andy Kearns

And can you elaborate a little bit on what that means, when you say...

Tarek A. Sherif

Sure, sure. It may mean a -- for a similar unit of sale, maybe anywhere between a 3% and 7% increase in price from the last time that they signed a contract with us. But again, I think the big driver revenue opportunity for us is the ability to cross sell some of the newer products that we brought to market. I think that's where we're going to get a lot of revenue growth.

Unknown Analyst

If you can sign another customer [indiscernible] would you think your revenue would grow in that [indiscernible]?

Tarek A. Sherif

Yes, I think that's 3% to 5%.

Andy Kearns

So I see we're out of time. So I think, with that -- I think we'll probably close down here. Thank you guys very much.

Tarek A. Sherif

Great. Thank you.

Cory A. Douglas

Thank you.

Andy Kearns

It's a pleasure having you. And then we'll have another company presenting here in about 5 minutes. So we'll have a little bit of time. Thank you.

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