Veeva's vision

Since its establishment in 2007, Veeva Systems has established itself as a premier provider of software solutions for the life sciences and pharmaceutical industries. The company’s strategic emphasis on this specialized sector has positioned it as an essential player in a field characterized by regulatory complexities that necessitate tailored software applications. Veeva's growth trajectory exemplifies successful industry specialization, innovation, and prudent capital allocation.

From Startup to Market Leader

Founded by Peter Gassner, who previously amassed valuable experience at Salesforce and MuleSoft, Veeva Systems identified a substantial market void: the absence of cloud-based software designed to address the stringent regulatory requirements of the life sciences sector. Seizing this opportunity, Gassner launched Veeva with an initial investment of only $2 million. Remarkably, the company achieved profitability within two years, driven by its inaugural product—a customer relationship management (CRM) system specifically designed for life science sales representatives.

Veeva’s initial success facilitated rapid expansion. By 2011, the company had generated $29 million in revenue, boasting a robust operating margin of 17.5%. This success marked the onset of efforts to diversify its product offerings beyond CRM systems, delving into areas such as research and development (R&D) and back-end operations. By 2013, Veeva's revenue had surged to $129 million, with profitability rising to 23%. The company soon secured over 50% of the market share in life sciences software, solidifying its leadership role.

By 2022, Veeva’s annual revenue had surpassed $2.4 billion, with operating margins between 35% and 40%. This outstanding financial performance underscored the company’s capacity to scale and fulfill its vision of becoming a comprehensive “System of Records” for clients, managing a wide array of functions from clinical research to customer engagement.

The Veeva Ecosystem: Two Core Cloud Offerings

Veeva’s product suite is divided into two primary cloud platforms, each addressing distinct facets of the life sciences industry:

• Development Cloud: Focused on R&D, this platform encompasses over 17 products that support quality control, regulatory information management, safety testing, and more. Contributing over 50% to Veeva’s revenue, this segment has experienced impressive growth rates of 51% in recent years.

• Commercial Cloud: Centered around Veeva’s flagship CRM product, which enjoys an 80% market penetration, this platform features 18 additional tools that cover data management, analytics, marketing, and content management. It serves as the main platform for customer engagement and commercial operations.

Product-Led Growth: The "Referral Sale"

A hallmark of Veeva’s strategy is its commitment to product-led growth, encapsulated in what CEO Peter Gassner refers to as the “Referral Sale.” Rather than relying on a traditional sales-heavy approach, Veeva emphasizes product excellence. Its early customers, highly satisfied with their experience, naturally became advocates, promoting the system to their peers. This strategy enables Veeva to allocate more resources toward R&D rather than sales and marketing, fostering a continuous stream of innovation and a significant competitive advantage.

This approach has proven fruitful, as Veeva maintains industry-leading profit margins while consistently expanding its product portfolio and growing its customer base. It has also allowed the company to sidestep the pitfalls associated with a reliance on a large sales force, a common challenge for many software-as-a-service (SaaS) providers.

Competition and Challenges

Veeva operates within a burgeoning life sciences market valued at approximately $2.7 trillion, experiencing an annual growth rate of 5-8%. Despite its dominant position, Veeva confronts formidable competition across various fronts.

In the Commercial Cloud segment, Veeva’s primary competitors are IQVIA and ZOHO, although Veeva generally outperforms these rivals in terms of product capabilities. In the Development Cloud, its main competitors include Medidata, a subsidiary of Dassault Systèmes, and Oracle. Among these, IQVIA poses the most significant threat, especially in the realm of commercial data, where it holds a near-monopoly. The competitive dynamic between IQVIA and Veeva has even escalated to legal disputes, with each company alleging unfair business practices against the other.

Additionally, Salesforce has emerged as a rising competitor, a company Veeva previously considered a minor threat. However, Salesforce’s recent entry into the life sciences CRM space, enhanced by artificial intelligence, has prompted Veeva to reassess this competition. With substantial resources for R&D and AI integrations, Salesforce has become Veeva's most formidable adversary.

Capital Allocation: Cash-Rich but Cautious

Veeva’s strong financial position has presented an intriguing dilemma for the organization. By FY24, the company had amassed $4 billion in cash, with limited options for strategic deployment. Veeva has adopted a cautious approach regarding acquisitions and has refrained from pursuing significant share buybacks or dividend payments, raising questions among some investors about whether this capital could be employed more aggressively to stimulate growth (one of the bear theses arguments).

Despite this financial abundance, Veeva management adheres to a disciplined capital allocation strategy, emphasizing the importance of cultural alignment and strategic fit in potential acquisitions, particularly those aimed at enhancing commercial offerings.

At the 2024 Investor Day in November, we expect management to provide medium-term targets and clarify their capital allocation strategy, which should weaken the bear thesis.

Veeva as a Public Benefit Corporation

In a pioneering move, Veeva became the first publicly traded company to transition to a Public Benefit Corporation (PBC) in 2018. This designation requires Veeva to balance the interests of multiple stakeholders—including customers, employees, partners, and shareholders. The decision to adopt the PBC structure was partly a response to customer concerns regarding their growing dependence on Veeva’s products. By legally formalizing its commitment to stakeholder interests, Veeva aimed to foster trust and nurture long-term relationships.

However, this structural shift has not been without criticism. Some view it as a mere formality, while others express concerns that it may expose Veeva to potential legal challenges if stakeholders feel their interests are not adequately represented.

Future Outlook

Looking ahead, Veeva faces a landscape of both opportunities and challenges:

• Product Leadership: Sustaining market leadership will depend on Veeva’s ongoing investment in R&D and the rollout of innovative solutions that align with customers' evolving requirements.

• Competitive Pressures: The entrance of Salesforce and the enduring rivalry with IQVIA necessitate that Veeva leverage its strengths while navigating a complex competitive environment.

• Strategic Capital Deployment: With $4 billion in cash reserves, Veeva’s ability to identify strategic acquisition opportunities and effectively allocate this capital will be critical to its future growth trajectory.

• Balancing Stakeholder Interests: As a PBC, Veeva must adeptly balance the sometimes-conflicting interests of its various stakeholders while continuing to deliver robust shareholders value.

Conclusion

Veeva is the kind of business we look for: mission-critical, founder-led, with a long growth runway, recurring cash flows, high ROIC, and a wide moat. We are willing to pay for such quality, and even at supposedly high multiples, we believe it is undervalued in the long term. Veeva is a core position for us, and we look forward to continuing our partnership with such a high-quality company.

We believe there are valid risks, but based on our research and conversations with various stakeholders, Veeva's moat appears impenetrable. Coupled with solid growth, this makes it a strong compounder.

(Media is from Veeva's IR)

Disclaimer: This article is for informational purposes only and should not be considered financial advice. Our hedge fund may hold positions in the companies discussed and may actively trade in these securities. Our views are based on publicly available information and our internal analysis, which are subject to change without notice. We encourage readers to perform their own research or consult with a professional financial advisor before making any investment decisions. We assume no responsibility or liability for any errors or omissions in the content.