Veeva: An Asymmetric Short

Summary

• In last month, IQVIA, has won 2 major CRM implementations at Top 10 Global Pharmas. This is notable as nobody but Veeva has won such business over the past 5yrs.
• IQVIA's pharma CRM is built on the same Salesforce.com platform as Veeva. In fact, it leverages more expansive mature version of platform.
• IQVIA has also announced that they launching a clinical focused product suite that competes with Veeva Vault in partnership with Salesforce.com Health Cloud.
• Veeva trades at 16.5x FY 2019 EV/Sales guiding for 17% FY 2020 growth. It's the most expensive its ever been relative to SAAS peers.
• I expect Veeva shares to decline by 30-50% over the next 12-18 months.
• This idea was discussed in more depth with members of my private investing community, The Razor's Edge. Get started today »

I believe Veeva Systems stock is a very compelling short.

Veeva’s Shifting Competitive Landscape in Life Sciences CRM

In Q3 Veeva derived 52% of its total revenue and 56% of its subscription revenue from its commercial cloud division. 90%+ of the revenue in this division comes from Veeva CRM for Life Sciences. Veeva’s market share in this space as measured by top 50 pharma sales reps seats is in the 90%+ range.

Since Veeva went public in November of 2013, no CRM provider other than Veeva has won a major new flag in top 20 pharma. In fact, even Veeva hasn’t won a major new flag in the top 20 in two years because essentially, they have them all. There literally has been zero competition in the top 20 as Veeva progressively replaced legacy Siebel or Cegedim/Dendrite CRM systems with their Salesforce.com platform backed Life Sciences CRM solution. That narrative just changed.

In the last month, and for the first time since Veeva went public, a competitor has won major new CRM business at a top 20 pharmaceutical company. Actually, to be more precise, at two of the top 10 ranked global pharmaceutical companies by market capitalization. That competitor is IQVIA.

The first notable win was at Roche which is the world’s 3 ^rd largest pharma by market cap.

IQVIA (NYSE: IQV) today announced that the pharmaceuticals division of Roche (F. Hoffmann-La Roche Ltd) has selected IQVIA’s commercial technology suite for deployment across more than 100 markets. IQVIA’s Technologies suite includes the Orchestrated Customer Engagement (OCE) Sales/Marketing, Master Data Management (MDM), ePromo and Organization Manager applications and will be a key enabler for this industry leader’s efforts to transform commercial engagement.

The IQVIA Technologies suite will be leveraged to drive more meaningful customer engagement and interactions, and to better inform commercial decisions. By seamlessly linking marketing, sales, medical science liaisons, account management, and other functions, this integrated portfolio enhances customer experience, strengthens relationships, and drives performance. The suite is built on best-in-class platforms, such as Salesforce.com, Mulesoft, Amazon Web Services, Heroku, and Box.

Under the terms of this multi-year agreement, Roche Pharma will rollout IQVIA’s OCE Sales, OCE Marketing, Organization Manager, MDM, and ePromo solutions for approximately 14,000 users across 100+ countries.

The second win came at Novo Nordisk which is the world’s 9 ^th largest pharma by market cap.

IQVIA™ (NYSE:IQV) today announced that Novo Nordisk, a global healthcare company with nearly a century of innovation and leadership in diabetes care, has selected IQVIA’s market-leading Orchestrated Customer Engagement platform for deployment across Novo Nordisk International Operations.

IQVIA Technologies’ OCE for next-generation customer engagement seamlessly connects marketing, sales, medical science liaisons, account management and other functions to enhance the customer experience, strengthen relationships and drive performance. IQVIA customers also benefit from more accurate decision-making through predictive analytics, machine learning and optimized performance. OCE is built on best-in-class platforms, including Salesforce.com, MuleSoft, Amazon Web Services, Heroku and Box.

Novo Nordisk plans to switch its existing platforms to OCE in 2019 and beyond for this global rollout, excluding Canada and the U.S., enabling them to streamline processes, further develop customer relationships and better anticipate, and respond to market changes.

Competition is always a factor in tech investing, but for a company trading at 16.5x FY2019 EV/SALES and at a hair of all-time highs it’s an even bigger concern. Veeva has gone from being the only SAAS winning CRM business in top 20 pharma over the past five years, to having a competitor suddenly win major new business at two top ten pharma’s in the span of a month. Change, to put it mildly here, is bad. This shift in of itself is enough to comfortably short any software stock trading at such a valuation, but in Veeva’s case the short thesis is even more compelling than it seems on the surface.

Veeva’s Unique IQVIA Problem

Veeva is vertically focused life sciences SAAS company. This is a very top-heavy space with the bulk of the addressable market concentrated in the world’s 20 largest pharma companies. Veeva’s top 10 customers accounted for 42% of all revenue in FY2018. To put that in perspective, Veeva has in excess of 600 customers, and 300+ CRM customers. The world's ten largest pharma companies employ over 50% of pharma sales reps. So, when you consider Veeva's top 10% of pharma CRM customers you are essentially talking about 90%+ of the TAM in the space. Their margins are what they are because of their vertical focus. When you are dominating and have 90% market share the model is fantastic, but if things flip even a little and someone else starts winning business revenue and profits will disappear in step function like manner. Naturally, anyone covering this stock should be concerned about the recent IQVIA wins in pharma, and for a change we got a sell-side analyst who was bold enough to raise this issue on the conference call.

Here is the IQVIA competition question and management’s response from the Q3 earnings conference call last week….

Your next question comes from the line of Bhavan Suri from William Blair. Your line is open.

Bhavan Suri

Hi, guys. Congratulations. Nice job there. Maybe for Matt and Peter just starting off at a high level, some of your new competitors in the Commercial Cloud space have announced some wins with top 20, Roche, Novo, whatever and starting to build out products to Vault. Just a perspective I’d love to hear your perspective on the competitive dynamics in the Commercial Cloud, have you seen any change in competitive environment out there? And then so for these specific wins did you see customers prioritize like a specific attribute price or data or something else that sort of led to sort of those competitive wins?

Matt Wallach

Sure. So I will start with the competitive market overall. So the pharma CRM market has always been competitive. We have never won every deal. And along the way we certainly have won most of the deals and that continues to be the case today as we continue to gain market share. There is one major competitor in the market today making a lot of noise that you are referring to and that company is kind of a combination of all of our old competitors, IMS, Cegedim, Dendrite and all the companies that they acquired along the way. And we typically compete against them on every CRM deal, but we always did. We always competed against one of those companies at least in the past. So that feels the same. It remains to be competitive. Peter talked about adding 30 new CRM customers this year. Almost all of those are against that company. And so our win rates continue to be high. Our focus is to continue to have the very best product, make sure our customers remain happy and continue to invest heavily in innovation to extend our leadership position. Now on those deals specifically because they have been named in the press, I can’t give too much about those companies just with respect to their confidentiality. On the last one that was just announced, I can share a little high level context though. So that company is the only big pharma that’s still running Siebel Pharma in the industry, which is a client server CRM system that hasn’t been enhanced in many years. So as you can imagine, that competitive situation is pretty unique and I don’t expect to see one like it again.

Veeva’s answer to this question raises some serious concerns. First, management completely ignores the Vault question and the fact that IQVIA OCT is being launched in partnership with Salesforce.com Health Cloud. I think the silence there speaks for itself. But what is really interesting here is the response on CRM. Let’s be clear, if there was an opportunity to replace a legacy vendor in large pharma, Veeva has won EVERY deal since they went public. Competitors have won some CRM business at much smaller pharma companies over that time, but where the TAM is in pharma CRM is in the top 20 companies. And that has been Veeva’s exclusive domain. They either win an outright total global replacement of a legacy system or they plant a flag in one region and gradually expand across the globe. We have not seen them displaced once in this time period or for that matter anyone else in CRM win a new roll out contract replacing one of the existing legacy systems in top 20 pharma. So, to say the competitive landscape ‘feels the same’ is misleading. It’s notably different. IQVIA just planted a flag in two of the top ten pharma’s by global market capitalization after having zero share in the top 20. Simply put, any change when you’ve been dominating as Veeva has been, is a problem. A competitor winning major business at two top ten pharma’s in a month is alarm bell type stuff.

The next issue I have with this response is the comment on the Novo Nordisk win as he chose to say nothing on Roche. He calls it unique because it’s legacy Siebel still, but reality is that’s essentially what the bulk of their displacements had been against since they went public. That’s not what is unique about the Novo win for IQVIA. What is unique about it is that Novo is on Veeva in North America and have been since 2015 or so. So, their 4000+ Diabetes reps in North America use Veeva. Which begs the question why didn’t Novo choose Veeva for the rest of the world?? Again, go back to the old Veeva conference calls, and all they talk about how once they plant a flag they gradually expand into a global roll out. It may take time, but it happens. Well, the opposite just happened here, Novo went with a completely different NEW CRM vendor for the rest of the world. Why? Was it price or was the product just superior? Novo Nordisk is the world’s 9 ^th largest pharma company by market cap despite being ranked 19 ^th by sales. Their diabetes business mints money. I have a hard time believing this was a nickel and dime decision. Don't you now have to wonder what happens when the North American Veeva Novo contract is up for renewal?

As for Roche, that’s the real unique competitive story as far as Veeva pharma CRM goes. Anyone whose followed this space closely knows that Roche has been the lone Veeva CRM holdout in the top 20. This is because Roche has been on their own Salesforce.com built custom CRM solution. Thus, in the past, Roche not leveraging Veeva’s CRM solution was easy to dismiss as a unique exception. Basically, the argument was they are on a custom build not another external vendor, so no big deal. Yet, after years of being the lone holdout, Roche has now chosen another Salesforce.com ISV for their pharma CRM. What does that say? What does it take to get a customer with a custom SFDC solution to switch to an external vendor? The obvious answer is added functionality and technological differentiation. The exception to the rule argument is now dead. The only other counter I can think of here is that Roche maybe has some sort of vendor axe to grind with Veeva, but even that doesn’t make sense. Veeva just put out this PR about Roche selecting Vault Promomats. So, they are clearly willing to do some business with them. Of course, even this well-timed PR is a bit confusing. Set aside that Promomats is a very commodity business and nothing like an eight figure CRM deal, but the IQVIA PR also highlights that Roche will be using their ePromo application. Now, there are two different buckets for Promomats. There is the content approval application where the content goes through a process to get approved, and that’s what I understand you get in IQVIA’s OCE ePromo. But then there is another bucket for the content gets stored. Now based on both PR’s it’s impossible to know exactly what has transpired here. But you can clearly conclude we have two competitors going at each other in a meaningful way, and frankly that’s all that matters for the stock.

See the competitive situation here to anyone who understands this business doesn’t feel remotely close to ‘the same’. It’s true IQVIA bought Cegedim’s business when it was IMS Health, but what Veeva doesn’t explain in this answer is that IQVIA OCE is not legacy Cegedim. Since OCE launched in December of 2017, Veeva has been competing against another CRM vendor in pharma whose product leverages the same Salesforce.com platform. This is a serious change when you consider the economics and differentiation involved competing against another ISV in pharma CRM leveraging the same platform and infrastructure. IQVIA has a massive core business to fall back on outside of CRM. For Veeva this has been their bread and butter. If IQVIA’s broader OCE offering is truly a superior product, then it’s game over for Veeva here. If they are just on par with each other, well then, the fact that they both leverage Salesforce.com platform infrastructure ensures Veeva is about to experience major price pressure from a competitor with ample room to be aggressive in grabbing market share.

Veeva’s management response also claimed their win rates continue to be high against IQVIA. This is interesting because when IQVIA reported in late October this is what their CEO had to say about their competitive performance in CRM since they launched their Salesforce.com enabled OCE suite…..

“We continue to have success in the market with OCE. And the recent number of smaller wins continues to drive momentum. Since we launched OCE in December, we have now won 15 out of 20 competitions in this space. We will have seen -- you will have seen that we’ve issued a press release last week announcing that our OCE platform was selected by Roche for global deployment.”-IQVIA CEO, Q3 CC

If IQVIA is winning 75% of the CRM competitions, then Veeva is losing 75% of the time. Somebody is not being transparent. Now, in IQVIA’s case they have the pharma press releases to back this up and have chosen to provide granular details on their call. Veeva’s comments on the matter seem like the standard vague responses of a vendor who doesn’t want to acknowledge publicly that things have suddenly taken a competitive turn for the worse. And there is a good reason for this…..

Veeva’s Complicated Salesforce.com Relationship

Veeva’s relationship with Salesforce.com has been critical to their success. They would never have been able to win massive cloud CRM deals in large pharma without having a reliable platform/infrastructure provider to fall back on. As far as Veeva is concerned, the deal has worked out amazingly well. I don’t think Salesforce.com shares the same view. The true-up requirement Veeva had to commit to a short-time after they went public was very rare in software and indicated to me that Salesforce.com was seriously considering other options and playing hardball. Regardless, agreeing to that $500 million ten-year true-up has not been an issue for Veeva thus far as they managed to conquer the entire market. But going forward, one does now have to wonder what exactly happens with this relationship.

Here is the notable risk disclosure in Veeva’s 10-k with respect to their Salesforce.com agreement:

Because key and substantial portions of our multichannel CRM applications are built on Salesforce.com’s Salesforce1 Platform, we are dependent upon our agreement with salesforce.com to provide these solutions to our customers, and we are bound by the restrictions of this agreement which limits the companies to which we may sell our Veeva CRM solution.

Our Veeva CRM application and certain portions of the multichannel CRM applications that complement our Veeva CRM application are developed on or utilize the Salesforce1 Platform of salesforce.com, and we rely on our agreement with salesforce.com to continue to use the Salesforce1 Platform as combined with the proprietary aspects of our multichannel CRM applications.

Our agreement with salesforce.com expires on September 1, 2025. However, salesforce.com has the right to terminate the agreement in certain circumstances, including in the event of a material breach of the agreement by us, or that salesforce.com is subjected to third-party intellectual property infringement claims based on our solutions (except to the extent based on the Salesforce1 Platform) or our trademarks and we do not remedy such infringement in accordance with the agreement. Also, if we are acquired by specified companies, salesforce.com may terminate the agreement upon notice of not less than 12 months. If salesforce.com terminates our agreement under these circumstances, our customers will be unable to access Veeva CRM and certain other of our multichannel CRM applications. A termination of the agreement would cause us to incur significant time and expense to acquire rights to, or develop, a replacement CRM platform, and we may not be successful in these efforts. Even if we were to successfully acquire or develop a replacement CRM platform, some customers may decide not to adopt the replacement platform and may decide to use a different CRM solution. If we were unsuccessful in acquiring or developing a replacement CRM platform or acquired or developed a replacement CRM platform that our customers do not adopt, our business, operating results and brand may be adversely affected.

Also, if either party elects not to renew the agreement at the end of its September 1, 2025 term or if the agreement is terminated by us as a result of salesforce.com’s breach, the agreement provides for a five-year wind-down period in which we would be able to continue providing the Salesforce1 Platform as combined with the proprietary aspects of our solutions to our existing customers but would be limited with respect to the number of additional subscriptions we could sell to our existing customers. After the wind-down period, we would no longer be able to use the Salesforce1 Platform.

Our agreement with salesforce.com provides that we can use the Salesforce1 Platform as combined with our proprietary Veeva CRM application to sell sales automation solutions only to drug makers in the pharmaceutical and biotechnology industries for human and animal treatments, which does not include the medical devices industry or products for non-drug departments of pharmaceutical and biotechnology companies. Sales of the Salesforce1 Platform in combination with our Veeva CRM application to additional industries would require the review and approval of salesforce.com. Our inability to freely sell our Veeva CRM application outside of drug makers in the pharmaceutical and biotechnology industries may adversely impact our growth.

While our agreement with salesforce.com, subject to certain exceptions, including pre-existing arrangements, provides that salesforce.com will not position, develop, promote, invest in or acquire applications directly competitive to the Veeva CRM application for sales automation that directly target drug makers in the pharmaceutical and biotechnology industry, or the pharma/biotech industry, our remedy for a breach of this commitment by salesforce.com would be to terminate the agreement, or continue the agreement but be released from our minimum order commitments from the date of salesforce.com’s breach forward. While our agreement with salesforce.com also restricts salesforce.com from competing with us with respect to sales opportunities for sales automation solutions for the pharma/biotech industry unless such competition has been pre-approved by salesforce.com’s senior management based on certain criteria specified in the agreement, and imposes certain limits on salesforce.com from entering into new arrangements after March 3, 2014 that are similar to ours with other parties with respect to sales automation applications for the pharma/biotech industry, it does not restrict a salesforce.com customer’s ability (or the ability of salesforce.com on behalf of a specific salesforce.com customer) to customize or configure the Salesforce1 Platform, and our remedy for a breach of these restrictions by salesforce.com would be to terminate the agreement, or continue the agreement but be released from our minimum order commitments from the date of salesforce.com’s breach forward. Some current or potential customers of ours may choose to build custom solutions using the Salesforce1 Platform rather than buying our solutions.

Reconciling the language in this agreement with the current state of affairs is not easy. IQVIA’s OCE is being positioned and promoted to pharma as a superior product leveraging a more expansive Salesofrce.com platform. Now, who’s doing the promoting here? Well IQIVIA of course, but Salesforce.com seems to be quite happy with this. And Salesforce has now partnered with them to compete directly with Veeva on the clinical side, which I think speaks for itself. Basically, the true-up is now meaningless to Salesforce.com, which means Veeva is kind of in no man’s land with this relationship. Salesforce has spent tens of billions building out their cloud and now clearly wants a bigger piece of the revenue pie in pharma then the force.com fee they get from Veeva, and IQVIA is helping them get there. At some point Veeva is going to need to address where the heck this is going, because two years ago they were a potential Salesforce.com tuck in acquisition and now they look like their exiled step child.

Valuing Veeva in SAAS Land

Veeva is trading at 16.5 FY 2019 EV/Sales and about 63x Non-Gaap FY 2019 estimated earnings.

Their current guidance implies 17% revenue growth in FY 2020 which will be down about 800bps from the 25% they will achieve in FY 2019.

Here is how Veeva compares on a EV/Sales multiple basis vs. its $10bl+ market cap traditional SAAS peers and its one vertical life sciences SAAS competitor.

	EV/FY 2019(CY2018) Revenue	FY 2020/CY 2019 Guidance/EST REV Growth
Salesforce	8x	21%
Workday	12x	26%
Servicenow	11.6x	29%
Splunk	8.5x	24%
Medidata	7.2x	18%
Veeva	16.5x	17%

Click to enlarge

As you can clearly see, Veeva is a major outlier on relative basis based on its current EV/Sales multiple and guided forward revenue growth rate. It’s trading at more than double Salesforce.com sales multiple despite guiding for lower revenue growth going forward.

Also, for the first time ever Veeva trades at a premium to Salesforce.com on a non-GAAP earnings P/E basis. This is interesting when you consider the relationship between the two. 56% of Veeva’s subscription revenue is still coming from its CRM dominated Commercial Cloud business. Salesforce.com gets a platform fee for every one of those CRM subscribers. As IQVIA’s OCE Life Science product is built on the Salesforce.com platform as well, Salesforce remains insulated from losing CRM subscription revenue in pharma. However, if Veeva loses pharma CRM customers to IQVIA, Salesforce.com retains the platform revenue regardless. In fact, it appears they stand to do even better economically based on the broader Salesforce.com platform their OCE product is leveraging. That’s a pretty asymmetric position Salesforce.com is in right now as far as pharma CRM goes. And this business is a small piece of their overall pie, while it’s over 50% of Veeva’s revenue. Now, I may be somewhat biased as I’ve been long Salesforce.com for the last year and was aggressively long it into its recent earnings, but I have a tough time seeing how this isn’t about as obvious as it gets. The tremendous earnings leverage Veeva got from its vertical conquering of pharma CRM on the back of the Salesforce1 platform is no longer there. You are now looking at a company that will grow EPS slower or at the same rate as revenue in the next year and is facing significant earnings power de-leverage risk as essentially another ISV targets their core customer base on the same platform. Yet, here it is trading at the type of sales multiple you see for the new high flyers in SAAS who are growing subscription revenue at 50%+.

Rarely do you see a relative valuation argument in a sector coincide with a fundamental competitive landscape shift dynamic like this. The large horizontal SAAS names are now starting to show notable margin expansion, and the market is starting to pay up for that. Even if you didn’t have this new competitive concern and the unique Saleforce.com related dynamic vis a vis IQVIA/VEEV, Veeva’s vertical SAAS margin story appeal vs. the horizontals is now no longer an investing theme to play. Furthermore, from a growth standpoint the SAAS space now offers so many choices for investors. Companies like Twilio, Nutanix, Atlassian, Okta, Docusign to name a few are where the premium sales multiples should be. To see investors paying up for Veeva at this stage in its life cycle as they are for those names is quite concerning. And to see the likes of Jim Cramer arguing this could be an acquisition target for the likes of Google is just flat out concerning. Forget the issues raised thus far in this report, anyone with the slightest understanding of Google aspirations in healthcare would know they wouldn’t even consider Veeva as a target at a third of its current valuation let alone where it is trading at today. Their business model is literally the antithesis of the type of companies Google likes to acquire. You are much better off betting Google tries a mega deal like acquiring Salesfoce.com or something more strategic like Nutanix in hyper converged infrastructure.

And let’s be clear, if you’re a SAAS focused investor, and I personally have been long/short across this space many times over the past five years, there are simply way too many more compelling stories to look at now. Workday, which has been an underperformer since the early 2014 peak, just printed its most impressive quarter in years. Even former skeptics like myself are now wondering whether Oracle has a major Workday Financials Management problem going forward. ServiceNow, which has been executing flawlessly, even looks relatively cheap after the recent run in peers. Medidata, which has been in the doghouse for the past two years, is finally showing decent subscription growth acceleration. Basically, at the margin, there are simply way too many more compelling stories in SAAS right now. If I was running a market neutral SAAS portfolio, and at these multiples (the highest I have ever seen in last 20 years) in software that is probably a very prudent thing to do, Veeva would be my top short pair for any long. And that’s irrespective of current competitive developments. The stock is an outright sell simply on the crowding out nature of more compelling opportunities and relative valuation across the whole space. That’s rare.

Conclusion

Veeva management has executed tremendously well since they went public. I have been both short and long the stock in the past, and I’ve done exceptionally well on both sides. They made a believer out of me when they gained traction in Vault despite the obvious TAM issues in CRM. That being said they have had plenty of luck along the way. Oracle basically abandoned Siebel on the life sciences side cause of the TAM. Cegedim had its own financial issues, and Documentum became an orphan inside EMC once the Dell acquisition started. The competitive landscape couldn’t have been easier for them. That has now drastically changed.

Veeva is a $14+ billion enterprise value company whose CRM business is now at a roughly $350ml-400ml annual subscription revenue run rate. They have 90%+ market share in Life Sciences CRM space. They called this TAM $2 billion dollars when they went public in November of 2013. They haven’t cracked 20% of that in 5 years despite having the entire market to themselves. Subscription revenue for the commercial cloud segment grew 8.8% yr/yr in the most recent quarter. This was with no real competitive “noise” to worry about. Their new competitor in CRM is leveraging the same Salesforce.com platform that they are on. There is a big renewal cycle starting in large pharma over the next 18 months. As Salesforce.com infrastructure is where the platform sits, the barriers to migrating to IQVIA OCE from Veeva are significantly lower. IQVIA’s product is leveraging a more mature and broader Salesforce.com platform. At best, Veeva is facing a major pricing pressure headache from every large pharma customer at renewal as IQVIA can price aggressively to win more top 20 major flags. IQVIA has also entered into a partnership with Salesforce.com Health Cloud to sell technology enabled services targeting Veeva’s clinically focused Vault product line. Vault’s growth rate is also slowing down as the easy growth has been achieved in this also much more finite than advertised TAM, and competitors have started to get their act together. You can draw your own conclusions about what these recent developments say about the relationship between Veeva and Salesforce.com, but as far as I’m concerned it appears they are now competing against two giants. Relative valuations and broader investing themes in SAAS now favor almost everyone else in the sector over Veeva. As the market adjusts to these changes and new risks, the stocks multiple should compress significantly. I see shares declining by 30-50% over the next 18 months. This is what an asymmetric short looks like.

Analyst’s Disclosure: I am/we are short VEEV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

long salesforce.com