Veeva $VEEV: How Do Life Sciences Alter the Software Business?
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Software companies, especially those of the venture-backed variety, carefully watch two related things: churn and customer lifetime value. There are various ways to optimize these, some more inspired than others. One is to be the sole supplier in a strictly regulated industry. Churn is low and LTV is superb, but there’s always the risk of an upstart winning regulatory approval, at which point your customers might be extra eager to jump ship after years of price increases and inflexibility. Another is to serve only enterprise customers, accepting longer sales cycles in exchange for large contract sizes and minimal bankruptcy risk. A third route, which companies like Shopify, Toast, and Block take, is to accept that, when serving SMBs, churn will be higher than ideal. Rather than fighting structural forces, it’s instead better to put more effort into lowering CAC and maximizing LTV for those SMB customers that do stick around. A fourth method, which Reed Hastings took in the past, is to adopt the view that customer goodwill is what really drives LTV over time. Consequently, one should make it as easy as possible to unsubscribe and realize that an Alaskan churning off in the summer will probably return once winter comes around and it’s dark 20 hours a day.
A fifth churn reducing/LTV enhancing philosophy, which one doesn’t read about too often in an S1 filing, is to become ‘relevant to the CEOs of the companies we serve.’1 This brings three benefits:
1) It forces you to work on something important, which will make it easier to go through inevitably difficult periods. The CEO of a customer you serve probably doesn’t spend her time worrying about whether her team is using the best available expense management solution.
2) It gives you insight into what other problems the CEO spends time trying to solve, informing your product roadmap.
3) If company CEOs love your product, it lowers the chances that customers will churn. This is less true the further one goes down the org chart. While it’s great when an entry level software engineer enjoys using your API, his enjoyment may not be enough when budget review comes around.
The software company that’s picked this philosophy is Veeva Systems, which provides cloud-based software for the life sciences industry. Two of its co-founders, Peter Gassner and Mitch Wallace, came from Salesforce in its early days. In other words, they appreciated the cloud opportunity ahead of others, and from there saw potential for a more vertical specific solution. Additionally, working at Salesforce gave them a significant competitive advantage starting out: Veeva CRM, its first product, was built on top of Salesforce, with an agreement that Salesforce wouldn’t build a competing offering. Consequently, at Veeva’s beginnings it had partnered with its most formidable competitor and also opened up the possibility of funding from VCs who backed Salesforce.2 It’s handy if when building a CRM product one can both neutralize the “Why won’t Salesforce build this?” objection and raise from investors who already understand the opportunity being pursued!3
As one might expect, Veeva began by serving life science sales teams, which in the pharma/biotech world means skewing towards a much larger customer base; a company waiting on FDA approval for the single drug in its pipeline probably doesn’t have a significant salesforce! The advantage here is that Veeva began its existence serving the most demanding of customers; the disadvantage is that, at the time of its IPO in 2013, Eli Lilly and Novartis each accounted for more than 10% of overall revenue.4 The second disadvantage, at least in terms of the IPO roadshow, is that it made Veeva look more like a services business than a software one:5
The company has since expanded its offerings, which can now be broadly split into two buckets:
Veeva Development Cloud – software serving the R&D side of the life science industry. This includes products for clinical trial management, patient safety, and regulatory adherence.
Veeva Commercial Cloud – software and data solutions serving the S&M side of the life sciences industry. Among other offerings, the software side includes Veeva’s first product, its CRM. Its data products are a more recent addition, and include customer reference data as well as anonymized longitudinal patient dat.
On the face of it, Veeva’s move into R&D is easily explainable. The customers it serves spend enormous amounts of capital developing new drugs, and so adding R&D products is a straightforward path to growing existing customer contracts. Furthermore, Veeva benefits from any acceleration in drug development timelines. The faster drugs are approved, the faster pharma sales reps are hired, and the more Veeva CRM subscription seats are purchased. If drug development timelines are artificially slow due to deficiencies in existing software tools, it’s worthwhile for Veeva to fix that. Moving into R&D is also worthwhile for a less obvious reason: it reduces Veeva’s customer concentration issues and slightly improves its negotiating position. Strong NRR figures are typically a positive sign for a business, but they should cause some pause when that business is serving enterprise customers only within a specific vertical. Veeva going public with NRRs of 187%, 159%, and 192% for the three years prior indicated customers want the product, but in concert with its customer concentration profile could also mean it was becoming uncomfortably reliant on a few behemoths. Even today, management partially measures the success of its product initiatives based on what portion of the top twenty pharmaceutical companies are using them. A move into R&D solutions partially solves this, while also making Veeva a rare example of a company that started serving larger customers and then proceeded to go downmarket. As mentioned above, the life science companies that need a sales team are those who already have FDA approval, a qualification that excludes a large portion of that vertical! The downside of serving these pre-approval customers is that churn will go up; the upside is that it diversifies the Veeva’s revenue base. Moreover, it gives Veeva the opportunity to indirectly benefit from any sort of biotech boom, and acts as a hedge should today’s largest pharmaceutical companies falter in the future. The quirk of the pharma/biotech world is that drugs don’t stay patented forever. Being a key supplier for Eli Lilly is a nice position to occupy, but not if Eli Lilly is unable to continuously innovate beyond its current drug portfolio. Serving the pre-commercial end of the market protects against this possibility.
Furthermore, pushing down market is likely what will enable Veeva’s data business to gain traction. Currently, its data products compete head-to-head with IQVIA, an incumbent that has served the pharmaceutical behemoths for decades. IQVIA’s not thrilled at the thought of its dominance being unseated, and has made it incredibly difficult for its customers to combine its data with any of Veeva’s. The upshot here is that Veeva’s had much more luck converting smaller prospects who aren’t yet using a data solution than a large business that’s used IQVIA for the past two decades. This is reminiscent of AWS in 2009: while the hope was to eventually serve the enterprise, its initial users were early adopters from smaller organizations, not Novartis!6 Said differently, the exact inverse of Veeva’s CRM go-to-market strategy is what will cause its data products to succeed over a 15-year time horizon.7
Veeva’s R&D solutions lead into a broader point about the company’s defensibility over time. The challenge with existing as a software business that serves other software businesses is that your customer base doesn’t always need to be investing in R&D. Sometimes having a lot of engineers is a mechanism to stop those engineers from working at competitors, at other times it’s a way to make operating margins seem worse than they inherently are, thereby warding off antitrust scrutiny, and at still other times it’s a result of investors focusing on revenue growth rather than cost cutting.8 As a result, software suppliers face the risk of a market downturn and customers deciding it’s time to trim/slash engineering headcount and focus on the bottom line. Life sciences businesses, for the most part, don’t have this luxury. While patents typically last 20 years, it often takes more than a decade for a drug to go from discovery to market, giving these companies little time to rest on their laurels. Meta has to worry about the threat of TikTok, but at least it doesn’t have to worry that its product will be a commodity in a few years! There are shenanigans pharma companies can play to extend the patent-protected lives of its products, but at a point they either have to produce new therapeutics or acquire companies that have done so. Veeva’s R&D solutions thus cater to a mission-critical function of life science businesses: over the next 20 years it’s unlikely that its customers will stop doing R&D. This remains the case no matter what interest rates do!
Disclaimer: The information in this post is not intended to be and does not constitute investment or financial advice. You should not make any decision based on the information presented without conducting independent due diligence.
Veeva didn’t actually raise much money, but Emergence Capital, an earlier backer of Salesforce, was on the cap table.
Veeva is currently moving off of Salesforce’s platform. When asked about whether Salesforce would now be a competitor, Gassner replied: “This is really hard building a pharma CRM. It's a really deep life sciences specific application. It's complex. It's different in different parts of the globe. Brazil is different than Japan is different than Italy.” (Q2 ‘23 earnings call)
a16z has a good piece on the benefits of having a services business as an enterprise startup that can be found here.
In a rare move for a publicly-traded company, Gassner has said it may take literally 15 years for most of the top 20 Pharma companies to use Veeva’s data products.
Byrne Hobart at The Diff has previously written about big tech pushing down their margins to avoid antitrust scrutiny. Chuck Akre has also talked about this in the context of Visa and Mastercard.