Medidata Solutions (MDSO) provides life science organizations with the ability to manage clinical trials more effectively and more efficiently. The core products of life science firms have, traditionally, been drugs, devices and diagnostics. The field includes biotechnology, pharmaceutical, biomedical technology and biomedical device companies. Challenges in the field include:
- expiring patents,
- increasing generic competition,
- government regulations,
- pricing pressures and
- adaptation to a global landscape.
The sheer cost of bringing a new life science product through a clinical trial to approval and then to market is daunting. Only 6% of commercial drugs return earnings greater than the life cycle costs. This explains why patents protecting exclusive marketing rights are so valuable. It also explains why decreasing life cycle costs is so critical.
Yet, in the past decade, trial costs have only increased. To ensure safety and efficacy, the requirements in every phase of a clinical trial have become more complex. More procedures are required. Eligibility of patients is more detailed. More patients are studied. Studies last longer. In the expansion and complexity of trial requirements, the sheer management of a trial takes its toll and has become a spending drain. Tufts University termed 25% of the procedures in a trial as "non-core". "Non-core" means they were not core to the trial's objective or design. Those non-core processes and procedures account for 20% of the trial's costs.
Simply capturing the mountains of data generated in a trial or study (electronic data capture or EDC) is a chore. Beyond that are the tasks of:
- planning the trial,
- budgeting the trial,
- executing the trial,
- managing the site,
- analyzing the data and
- reporting the results.
Technology can decrease the time spent in and the costs of such management. It allows those resources to be redirected back to innovation in the life science field. Companies like Google (GOOG) capture and analyze a user's search habits to then intuitively serve that user. In the same fashion, "rich" data is buried in the data generated by clinical trials and studies. But, visibility to the rich data has historically been quite limited. Mining and leveraging that data could dramatically and positively impact the future of life science development. To date, Medidata claims to have access to more transactional, financial and operational data from clinical trials than any other company.
The technology platform from Medidata Solutions has become the industry standard of IT solutions that optimize life science clinical development. Its competitive advantages include:
- cloud-based solutions,
- knowledge of clinical development processes, and
- understanding of government regulations.
Medidata is setting records each quarter in metrics such as revenue, multiple-product expansion, application backlog and requests for bid.
Revenue is generated from application services and professional services. Through the application services segment, a customer purchases a license for, or "right to use", Medidata's cloud-based software solutions. The license is applicable for either a single study or a multi-study. Assisting customers with design, workflow or management of the study is purchased on an "as-needed" basis through the professional services segment.
In 2012, annual revenue grew 18% to $218 million from $184 million for 2011. Revenue in the 2013 first quarter of $63.3 million was already tracking at 29% into 2012's run rate. Medidata also reports its "backlog" which consists of the future contract value of application services arrangements. The backlog for 2013 was $186 million, up 38% from $135 million at the beginning of 2012.
The number of customers has more than doubled in the three years from the beginning of 2010 (173) to year-end 2012 (350). It is not uncommon for a customer to prove the Medidata platform with a single-study before renewing to multi-study, multi-year commitments. New customers in 2012 totaled 102, representing a 41% increase in both count and revenue. Medidata's annual retention rate was an exceptional 90.5%. The number of new customers purchasing more than one license doubled over the number doing so in 2011. Of all customers, 38% own more than one "right to use", up from 32% in 2011.
The 2013 first quarter added a net of 8 more customers. The quarter's retention rate elevated to 99.9%. Multiple-license customers jumped to 41%. So, beyond a simple growth in the number of customers, Medidata is seeing healthy increases in the average sales price per customer.
Medidata Solutions is by no means a mature company. Having only been in business since 1999, it competes for a slice of the life science industries' $120 billion spend. In its first decade, Medidata's focus was to drive customers away from paper document analysis and management to electronic data capture and storage. Since 2009, its emphasis has shifted to the cloud platform with applications designed to improve the clinical trial life cycle. Such growth is not free. But, then again, the potential is promising. The "clinical cloud" market is projected to be a $6 billion opportunity.
Typical of a growing company, Medidata Solutions has invested $97.7 million in R&D in the past three years equating to 17% of revenue. Likewise, sales and marketing expenses for 2010 through 2012 tallied $114.5 million, 20% of revenue. Medidata's long-term goals for R&D and sales and marketing as percentages of revenue are 16% and 18% respectively. The spend for 2013 is not yet expected to meet those goals. On the other hand, Medidata is managing its recurring capital expenditure needs. The trend line is decreasing from $6.8 million in 2008 to $3.9 million in 2012. Capital expenditures in 2013 are projected to spike to $31 - $32 million with primary investments being made in office space improvements and data center purchases.
Medidata has accumulated $124 million in cash and cash equivalents on its balance sheet. Non-current debt obligations are negligible at $6.8 million. Medidata's largest liability is deferred revenue which are payments received in advance of revenue recognition. Large deferred revenue balances are common for software companies. Customers often pay licenses and maintenance fees in lump sums to cover an extended period in the future.
A thorough look at Medidata's financials has to include an analysis of its current P/E ratio tracking over 90. Even its forward P/E ratio is over 45. The market often prices aggressively growing companies into brow-lifting P/E ratios. Analysts' long-term growth projection for Medidata's EPS does average 21.75% which more than doubles the S&P 500 estimate of 9.42%.
Morningstar (MORN) recommends evaluating the fair value of aggressively growing companies by metrics other than P/E or PEG ratios. For example, revenue and income should be growing at a similar pace. For Medidata, this is true. It suggests looking at cash flow to determine if the company is truly making money. Medidata is. Further, Medidata is not relying on debt to fund its operations. Its return on equity is 14.9%, running ahead of the industry average of 10.2%. Stockholders' equity has grown from $20 million in January, 2010 to $142 million at year-end 2012. It stood at $154 million after the first quarter of 2013.
During first quarter reporting, Medidata raised its 2013 revenue guidance 1-1/2% - 2% to a range of $270 - $274 million. That target represents a mid-point year-over-year increase of 24%, slightly ahead of analysts' estimates. Earnings per share are projected to grow at a comparable pace from $1.03 in 2012 to $1.29 in 2013. First quarter EPS came in at $0.35 on an adjusted non-GAAP basis. The earnings represent 27% of the year's projection.
With all the indicators of healthy growth and a healthy balance sheet, it is reassuring that Medidata is not reliant on a sole customer. No single arrangement or customer has the ability to significantly disrupt revenue flow. Factor in that 20 of the top 25 global pharmaceutical companies are customers and it is evident Medidata has established a broad and stable base in the industry. Yet, the opportunity to expand is still robust. Nearly 60% of existing customers are still single-licensed. Of the 41% purchasing multiple licenses, very few have adopted Medidata's entire solutions platform. As well, there are over 2000 companies that run clinical trials. Outside the life sciences field, opportunity also exists for investments by academia and government institutions.
As Medidata expands its footprint in the life science industry, it paints itself as an innovator. It does not intend to be solely a reactor to the demands of its customers. Just as it led the rally to electronic data capture and then further to optimize the clinical trial life cycle, Medidata strives to be a catalyst in the industry. It wants to provide the platform that spurs customers to think differently about how to do their business, how to access their data and how to push past borders that had limited their ability to deliver value.
Medidata is well-positioned to maintain a market designation of "aggressively growing". Its 50-day moving average is just over $70. It set a new 52-week high of $78.21 on June 28th and closed the week at $77.45. Filtering for software companies similar to Medidata, with little to no debt, a worthy return on equity and above-average growth projections, returned three applicable comparisons.
Another cloud-based, life-cycle solution technology provider is The Ultimate Software Group (ULTI). Ultimate provides human capital management (HCM) solutions. The adoption of cloud-based HCM solutions by life sciences companies was instrumental in addressing their previous privacy and security concerns about using cloud computing for core business processes like clinical trial management. Catamaran Corporation (CTRX) is a pharmacy benefits management and healthcare benefits management software provider. Sourcefire (FIRE) is in the high-demand business of cybersecurity.
The table below calculates the forward P/E ratios based on price targets and 2014 EPS estimates. The forward PEG ratios are then derived using analysts' long-term growth projections. The average of the three PEG ratios equates to 2.52. Reversing the calculations derives a fair 12-month target for Medidata.
12 Month Price Target
2014 EPS Estimate
Long-term EPS Growth
The Ultimate Software Group
Medidata Solutions is not a household name. The names of business-to-business software providers aren't likely to be the most commonplace. Yet, investors willing to pay a premium for future earnings may want to spend some time and effort to further research those lesser-known companies. For in its world, Medidata Solutions is changing the world. And, it plans to continue to change its world - even leading the charge. In doing so, the precious time and funds of life sciences companies should be redirected to research - the research for solutions that will improve quality of life. Thus, Medidata Solutions is ultimately, though indirectly, positively impacting mankind.
Additional disclosure: I plan to recommend MDSO to my investment club in July.