"Was all this legal? Absolutely not!"- Jordan Belfort, Wolf of Wall Street
While Wall Street and the financial media remain asleep at the wheel, we have continued our extensive field research into the Life Sciences CRM IT space.
Over the course of the past month we have surveyed (including one full day ride along) a good deal of pharmaceutical reps (including over 50 mostly Irep users) with respect to their CRM and broader daily technology daily activities. We did this with the aim of learning more about functionality, and ultimately the future of the pharma sales rep role and tools. We will share those findings at a later date. Today, we'd like to focus on the implications of a recent Veeva (NYSE:VEEV) CRM customer loss on our overall short thesis.
In the process of surveying pharma reps during the past month, we were surprised to discover that Genentech is no longer using Veeva CRM. This jumped out at us because Genentech was cited as a Veeva CRM customer in the press coverage of the IPO, and more notably because they were Veeva's 1st big name CRM customer win back in 2007/2008. Genentech is the poster child in life sciences for IT innovation and cloud adoption. They lead and others follow, so their decision to abandon Veeva warranted a closer investigation. What we discovered was a lot more interesting than the simple fact that Veeva actually lost an existing top ten pharma CRM client. (We estimate the impact at no more than 2,000 seats for Genentech/Roche North America, and to the best of our knowledge this revenue is off the books as of Q2/Q3.) What is interesting here is not the seats lost, but rather the fact that it is Genentech/Roche (OTCQX:RHHBY) who Veeva's lost (The world's #1 Biopharma company with $37.5 billion in sales in 2012 and a current market cap of $240 billion), and more importantly that the seats lost were to Salesforce.com's (NYSE:CRM) PAAS solution.
To give you a little background on the matter. Genentech, the world's most innovative biotech company, was the earliest life sciences player to make a big push into cloud. It adopted Google Apps across the enterprise, build custom apps like 'Peeps' (corporate directory) and 'Kudos' (loyalty rewards), and has been using the salesforce.com platform since 2007 (they are 2nd largest implementation of Salesforce.com worldwide).
So, in 2007/2008, Genentech leads the way in Cloud CRM with its adoption of Veeva/Salesforce. In the spring of 2009 Roche acquires Genentech and during the integration Roche North America's CRM is ported from Siebel to Veeva. Then at some point in time about a year or so ago (this timeline can be verified through publically available information online with respect to development/implementation which we are not linking to here out of respect for individual privacy…though just to be thorough we also independently verified this information with reliable industry sources), Genentech/Roche North America decides to dump Veeva in favor of building its own custom in-house solution on the Salesforce.com platform which went live over the past few months. Basically, it used the Force.com platform in the same way Veeva did in building out its CRM solution. This appears to be consistent with Roche's global initiative to standardize on the Salesforce.com platform. As Roche, outside of North America, has over the past three years been porting Siebel/Stay in Front CRM solutions all to the Salesforce.com platform. This news is a little more relevant seat wise because Roche ex-North America has 16,000 crm seats that will now never be available to Veeva to sell into because they have ported straight to SFDC. (You can read in detail about this implementation here) Again, seat numbers are beside the point here; Genentech wouldn't have made a move like this for 2,000 reps if it felt they could get what they needed out of Veeva no matter what Roche Global was doing. What is of interest is what this move says about the Veeva/Salesforce.com relationship going forward, and the 'cutting edge' nature of the Veeva crm offering.
In our initial presentation, we mentioned that the Veeva/Salesforce.com deal comes with its share of longer-term risks, but we certainly didn't expect to be confronting those risks two months after the IPO! In fact, our short thesis and valuation of Veeva happily conceded nearly the entire LS CRM market to them. This development raises very serious issues that even the most blindly bullish investor can't ignore. We'd say it is the straw that broke the camel's back, except it's definitely not a straw. When a sector innovator and leader abandons what is being promoted as a cutting edge solution, we take notice.
Our read into this is pretty clear, the Veeva CRM's product success has not been about "very deep application functionality". It's been about price, and the unique human capital edge they possessed for displacing Siebel's strategically- neglected product. Moving forward, a standardized commodity solution like Veeva is completely the wrong CRM product for the future of pharmaceutical sales. This is an industry in which the way drugs are being sold and marketed now drastically varies across commercial divisions, as well as across products. The foot soldier approach is going to go the way of the dinosaur.
So, what are the investment implications of all of this?
Well, in our opinion there are two main points to focus on:
1) ASP's per LS CRM seat will be going down and not up.
This is a no-brainer assumption which we pointed out in our original thesis. These findings make it a foregone conclusion. If you are a big pharma company that completed a large crm implementation over the last few years, you are not going to be looking at price increases. Rather you will be in a strong position to ask for price concessions. From a purely economic standpoint, converting to a Force.com license and leveraging the existing development ecosystem to build a custom solution on the platform is going to save you money and provide you with a more customizable offering for your unique needs. So, you either make a strategic call to go this route for the long-term, or you use this as bargaining power to get what you want. Either way, this is not good news for Veeva's future CRM ASP's. (It is also quite material news when you factor in the sell-side has modeled asp's quadrupling over the coming years.)
2) Veeva's bargaining power with Salesforce.com is Zero.
Keeping point one in mind, Veeva is in a very precarious position with respect to Salesforce.com. When their value-added reseller agreement expires next year, we doubt Salesforce.com will renew it without a big financial concession. They simply have no strategic or financial incentive to renew it as is. That means Veeva either offers a very lucrative margin in addition to the platform access revenue or they leave their customers with a choice. That choice will be between staying on the Force.com platform or moving to whatever new infrastructure Veeva will be offering. When you consider the investments these companies have made in Salesforce.com infrastructure and the fact that they are likely to be using even more Salesforce.com services across their organization, this is not much of a choice. Add in the development ecosystem around Salesforce.com's Force platform and the fact that the world's leading bio-pharma just completed such a migration, and we now clearly understand why Veeva IPO'd when they did and the need to aggressively market themselves as something more than a LS CRM company. Their CRM business model is a Virtually-Zero-Barrier-To-Entry business. IMS Health's recent acquisition of Force.com based LS CRM ISV 360 Vantage further supports this (we will share more about this pharma IT monsters IPO and what interesting moves they have been making in a subsequent piece). If anything, when all is said and done, Veeva will probably have ended up acting like a Trojan horse for Salesforce.com. By catalyzing a quick transition off of Siebel, they have opened the door to embedding their PAAS model inside the entire life sciences industry. (Note we have been long Salesforce.com because of this hunch since our original thesis.)
We'd also like to point out that our discovery of this development also raises very serious questions around the two big catch-phrases associated with the Veeva IPO.
1) Verticals Do It Better
If the world's leading bio-pharma company by revenue and earliest cloud adopter, as well as 1st big name Veeva CRM customer, feels the need to transition off a Vertical solution to an in-house custom offering, that is clearly not the case.
2) Vertical is the new Horizontal
If a vertical solution built on top of the leading global CRM's horizontal platform is replaced by the world's leading biopharma company with a custom solution built on that horizontal platform, this is again clearly not the case. As we argued in our original thesis and as is often the case in technology; the platform providers are where you want to be invested.
Sensational claims around an IPO don't take much work to discredit, which is why in this case we remain shocked that nobody else has raised these issues. We note the timeline around the Genentech/Roche developments clearly pre-dates the initial public offering period. Now, while we don't expect a press release on the matter, we are rather surprised this risk was not disclosed in the S-1. Sure losing access to the Salesforce platform is in there, but there is definitely no mention of losing major customers to that platform; this is a material and clearly very real risk. And isn't the whole idea of risk disclosures to keep them as broad as possible so as to shield yourself from potential future liability? Based on our research, it now appears evident that the biggest threat to Veeva's CRM business is in fact Salesforce.com robust PAAS offering, and what technologically savvy LS companies can do with it on their own. Even if it was not in the S-1, you'd think that at least one sell-side analyst could point out that this threat is in fact very real; nope, not in this market. Sell the story no matter what, and leave dealing with the consequences to someone else.
A Consensus Shocker….
The consensus view out there on Veeva is that CRM is slam-dunk, and that salesforce.com relationship is in the bag. We pointed this out in our initial thesis as something we were willing to readily concede, and still be short the stock with an expected 75% downside. Inaccurate disclosures, convenient omissions, very poor underwriter sell-side assumptions as well as analysis, Veeva's extreme relative valuation outlier nature with respect to Medidata (NASDAQ:MDSO) and Cegedim, crystal clear TAM overstatements in the CRM space, similar TAM issues in ECM and MDM, strategic question marks in those areas, telling comps like the Qumas deal, and extreme media hype around the IPO were our primary focus. This news comes as a shock to even us. Though we acknowledge the competitive/business model concerns raised here far outweigh any lost revenue from the Genentech seats, this is not a value stock. Veeva can't afford to lose even ONE crm user seat due to a displacement of any sort, let alone all the seats they had at the world's leading biopharma company.
Now ask yourself these questions:
If Genetech/Roche built a mini-Veeva on top of Salesforce.com, is the future of their LS CRM business a slam-dunk?
We can only imagine how many of Veeva's early sales pitches were, "if we are good enough for Genentech, we are good enough for you." What happens to that pitch now?
If Genentech/Roche chose to go this route, why won't Amgen or Pfizer eventually follow them?
Is the Salesforce.com relationship not a major cause for concern?
What is the gap between perception and reality here?
To answer the last question, that gap is huge.
Additional disclosure: I am long CRM.