Veeva: Mad Science And Train Wreck IPOs

Dec.19.13 | About: Veeva Systems (VEEV)

Henry: Look! It's moving. It's sha - it's... it's alive. It's alive... It's alive, it's moving, it's alive! It's alive, it's alive, it's alive! It's ALIVE!

Victor: Henry - in the name of God!

Henry: Oh, in the name of God! Now I know what it feels like to BE God!

-Frankenstein, 1931

We have over the past two weeks received quite a few inquiries from fellow investors regarding Veeva's (NYSE:VEEV) Life Sciences CRM addressable market. What has surprised us is that one particular analysis put out there by one of the underwriters has gotten so much attention. This analysis is highly quantitative which we guess is why it is has received a good degree of interest. Ironically, when we read it, our first impression was that this was the work of a mathematician gone mad.

Just take a look...

A Bottom-Up Approach

Another way to size the market is to simply see how many potential customers Veeva can secure, and apply an average annual recurring revenue figure. It is important to note that currently most customers are only using the CRM product, so this analysis only refers to the CRM market. We have used the company's most recent reported quarterly data, which was FQ2 2014. The company reported $49.5 million in total revenue, with $34 million in subscription (or recurring) revenue. The company also disclosed that it had two 10% customers in Novartis and Eli Lilly. Exhibit 4 highlights our assumptions for total available market.

First, we back out the two large 10% customers, which get's us to $27 million in recurring revenue. Annualized, this works out to be $108 million. Veeva disclosed that it had more than 170 customers.

We assume that 75% of the revenue will come from only 15% of Veeva's largest customers. The other 25% should come from smaller customers, which make up approximately 85% of Veeva's customer base.

We then do the math and deduce that for the largest customers, the average annual recurring revenue (NYSE:ARR) per customer is $2.4 million. For the smaller customers, we get an average ARR of just less than $200,000 per year in ARR.

Using market data, there are approximately 23,000 Life Sciences companies worldwide. We conservatively assume that Veeva can eventually secure a 20% market share in this market. That gives us 3,450 potential customers. We note that given the vertical-specific nature of the company's products, this market-share assumption could turn out to be quite low.

Applying the $2.4 million ARR to the top 15% of those gives us a TAM of $1.6 billion. Applying the $200,000 ARR to the other 85% gives us an additional $775 million TAM, for a total of $2.4 billion for the company's CRM product.

Should this analyst now take a crack at the Beal Conjecture?

Now our Takedown of this Nonsense

Worldwide pharmaceutical sales totaled $800-$850 billion in 2012 according to Pharmaceutical Executive, Cegedim Strategic Data, IMS Health, The European Federation of Pharmaceutica Industries and Associations, Marketline, and countless other sources. (you can confirm the data here or here) The top 50 companies accounted for 70-80% of those sales. Yes, 50 companies, it is called BIG PHARMA for a reason. These same 50 companies are what everyone in LS CRM, including Veeva, use as their addressable rep market.

"So for the base CRM product, when we think about the high end of the market, you mentioned 500 companies. We measure in track, kind of the top 50 pharma companies. So if you look across the top 50 global pharma companies, at all of their pharmaceutical sales reps, we penetrated roughly one third of those users. " Matt Wallach, Veeva 3q CC

50 is 0.20% of 23,000. Applying this number to the mad genius analysis from above gets you a global CRM life sciences TAM of $4.8 million. Now, our research indicates that there are about 500-2,000 companies on planet earth with a drug to sell and at least one sales person to sell it.(the more reliable number is closer to a 1,000, but we will be generous) Applying this customer range to the underwriter's bottom-up analysis gets you to a CRM life sciences TAM of $48-$240 million. Now we know based on actual Cegedim and Veeva revenue numbers that the market is clearly bigger than that (closer to $700 million), but that is not the point here. The mere fact that one of Veeva's own underwriters would try and TAM the market this way shows how fundamentally flawed their understanding of the LS CRM market is. It also establishes conclusively that the vast majority of Veeva's revenues are coming from 20-30 customers at most. Basically, the customer count number is very misleading, and this is why they were so reluctant to break it out with respect to CRM for the SEC. (also further evidence that the live CRM user number which was disclosed at the Veeva User Conference four weeks before filing should have been in the S-1)

Also, we'd like to point out that the Marketline report referenced in the S-1 by Veeva doesn't agree with what they disclosed.

Here is their disclosure:

"According to MarketLine, in 2012, life sciences companies had combined global revenues of approximately $1.6 trillion, and the industry is expected to grow at a compound annual growth rate of approximately 6% per year through 2016." Veeva, S-1

Now, from the exact September 2012 Marketline report cited in the S-1:

"The global pharmaceuticals, biotechnology & life sciences industry grew by 6.8% in 2011 to reach a value of $1,107 billion. In 2016, the global pharmaceuticals, biotechnology & life sciences industry is forecast to have a value of $1,535.7 billion, an increase of 38.7% since 2011."

So, they actually used the 2016 estimated market size as the 2012 actual size. Furthermore, this Marketline report is only current as of 2011 for reported global life sciences revenue. And we checked to make sure this is not just a citing error, as the more current data from Marketline also doesn't agree. (i.e. they have the biotechnology market only growing $10 billion from 2011) Though we are still trying to understand how $1.53 trillion gets rounded up $1.6 trillion, and at the same time a 6.8% cagr gets rounded down to 6%.

You are probably thinking how could all of this be possible for a $6 billion dollar IPO. We are thinking exactly the same thing. Maybe it's about time Jim Cramer tasks someone to read 'those blogs' before dismissing them and saying "buy, buy, buy." Maybe it is also about time that some of these underwriter's compliance departments take a look at this 'research' mess and pull these shameful reports.

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.