"Of all the offspring of Time, Error is the most ancient, and is so old and familiar an acquaintance, that Truth, when discovered, comes upon most of us like an intruder, and meets the intruder's welcome."-Charles Mackay
And here we thought we would get some time off on this one.....
Monday after the close, Accelrys (NASDAQ:ACCL), a global leader in scientific innovation lifecycle management software, announced that it was acquiring Ireland-based Qumas, a leading compliance and quality management solutions provider for the life sciences industry. This news caught our attention because Qumas' name came up more than a few times in our deep dive into life sciences enterprise content management. Behind EMC, CSC and Opentext it was one of three pure life sciences focused document management systems providers(the other two being NextDocs and Mastercontrol) that we looked into. This is about as good of a comp as you could ask for Veeva Systems' (NYSE:VEEV) Vault, and now that Accelrys has acquired them everyone can freely reach their own conclusions about valuations in this space.
The deal terms were $50 million in cash or exactly 2.5x Qumas' 2012 revenues. Think about that for a second. This is a company with over 270 deployments in the life sciences space, and they just sold to another leading life sciences player for 2.5x sales. Veeva is involved in about 50 deployments and recognized Vault revenue in 2012 of around $1.5-$2ml. If over the next few years they get to Qumas' revenue run rate in Vault, what's the market value of that business? $50 ml, $100mln?
Now consider that based on our analysis the market is valuing Vault at between $2-$3 billion. Basically, you are paying anywhere between 1000x-2000x 2012 revenue for this business today. Did the Qumas' shareholders just leave a few billion dollars or 98% of the pie on the table? Is Accelrys now worth quintuple what it was trading at before this acquisition?
You get our point yet?
The consensus view out there is that MDM of customer data in life sciences is a small addressable market. There is no doubt about that. If Veeva were to completely own this market (and remember they just entered it), it is probably worth max $400 million in market cap. That leaves CRM for which we'd say an EV/Sales ratio of 8x is extremely generous (we'd be at 5x here) considering their penetration. Run that against Q3 revenues annualized and you get $1.7 billion. That basically leaves $3.7 billion in EV for Vault. For a tiny fraction of that amount you could buy all the niche focused LS ECM companies that are highly regarded in the space. In fact, with $1 billion worth of Veeva's Bitcoinesque currency, you could acquire Cegedim's entire CRM/SD division ($657mil 2012 rev), all of Accelrys/Qumas ($182ml 2012 rev), Nextdocs (Sharepoint based LS ECM), Reltio (small LS focused MDM), and still have some spare change. At which point you are a $1 billion+ revenue company with 70%+ share in LS CRM, the top global HCP database provider, a pure MDM solution provider, a leader in scientific lifecycle management, and a diverse portfolio LS ECM solution provider. That's just crazy, and goes to show that our research into this space was spot on.
LS ECM is nothing like LS CRM. It is a much more fragmented and extremely competitive market. Things move at a snail's pace because you are dealing with very regulated processes. The sales cycle are long even for small deals which is basically the polar opposite of what Veeva has dealt with in SFA in displacing Siebel over the last 18 months. Basically, regardless of what you think of the Vault offering, this is NOT a segment suited for those selling a high growth/high multiple story. NextDocs has done nothing but exclusively focus on this niche and it still took them 5 years to get to $15 million in revenue. Qumas has been around for a while and is very well regarded by everybody in LS ECM, and yet still did a hair under $20 million in revenue last year. And let's not forget about Documentum. These guys are a beast in life sciences, and clearly not content to sit on their hands like a Siebel in CRM. In the last year, EMC IIG (Documentum) purchased Trinity Technologies and Sitrof Technologies. The former is an energy sector-focused ECM consulting firm while the latter is a Life Sciences-focused firm. Basically, EMC IIG has decided they are going to inhouse the expertise in highly technical industries they serve to improve their service offerings. If the leader in the space found it necessary to acquire 50 highly technical consultants with pure LS ECM expertise, what should that tell you about their commitment to the sector and the direction they want to take their clients? Not that EMC IIG needs to be thinking this way as there are plenty of customers who won't even consider switching because the compliance risk is just too high. Still, no matter what you think about the space, EMC clearly isn't planning on just sitting back and playing defense. Then you got to ask yourself about the Accelrys/Qumas merger. You now have a fully integrated vertically focused play on the process/reg side of things to compete with. What do you think the pitch against them will be? Umm, we have this great SFA iPad app for pharma reps so just disregard everything they have been leading in on the technical side of things and go with us. Like we pointed out before, Veeva has milked the 'specialists do it better' argument for LS SFA. Yet outside of CRM there are nothing but pure specialists in the LS technology space (clinical, compliance, process etc). Their whole sales pitch falls apart against this type of competition as they flip the script on them. And more importantly the specialists who are succeeding are still willing to sell at 2.5x sales. Basically, this deal just blew everything the Veeva Six have said about Vault's value out of the water. We can't wait to read the notes on this one. We are sure by the time the they are done spinning this Qumas will have some Irish bank subsidiary that was on the brink of collapse because of speculative real estate bets, and thus the Accelrys deal was in fact nothing more than a bailout.
And the band played on....
Disclosure: I am short VEEV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional Disclosure: This article was written by a director at Suhail Capital Management.