medidata: a short thesis

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  • Medidata: A Short Thesis Ticker: MDSO US Equity

    Summary: The EDC Market Opportunity ........................................................................................................ 2

    Medidatas Non-EDC Market Opportunity............................................................................... 5

    Medidatas Non-Rave Products ................................................................................................... 8

    Industry Findings .............................................................................................................................. 17

    Medidatas Vertical Valuation Reality .................................................................................... 21

    Parting Thoughts on Vertical SAAS in General .................................................................. 26

    Conclusion ............................................................................................................................................. 26

    Before we get into our thesis, we would like to point out that Medidata is a bit unique for us because we have at times held small long exposure in the stock as a partial hedge on our short in their vertical SAAS Life Sciences counterpart Veeva Systems. While the relative value hedge appeal was the main driver for that, we were also on the surface a lot more comfortable with the clinical market versus the commercial segment of the pharma space. Generally speaking, we assumed Medidatas story was about servicing small and medium-sized life sciences companies. We also assumed that the market IQ on a company that went public in 2009 would already be very high, and thus there would be little room for value-add here let alone huge deviations between perception and reality. Well, you know what they say about assumption, its the mother of all.. Anyway, having been down this road once before, it didnt take us too long to get up to speed. So, lets get into it!

    Our story begins as most Vertical SAAS stories begin these days, with a Very, Very,

    Very, BIG TAM.

    Medidatas $10+ Billion eClinical TAM

  • The EDC Market Opportunity The best place to start this exercise is by looking at how Medidata was sizing this market around the time it went public. Pre-IPO Medidatas CEO from a 2007 interview:

    Medidatas sizing of the overall EDC market, Sherif reports, relies on conservative assumptions about numbers of EDC-appropriate clinical trials a year (8,000), per-study pricing ($150,000) and the adoption of EDC. Sherif says the actual total number of trials is probably closer to 12,000 studies annually, and the industry-wide average for EDC-related software and services is more likely $270,000-$350,000 per trial.

    Even if the number of trials and price per trial do not change, a rising rate of adoption will bring the market from a $350 million level now to $1.2 billion in a few years.

    Now from the MDSO prospectus for their June 26, 2009 IPO:

    Compared to traditional paper-based data collection, EDC technology provides substantial benefits at all stages of the clinical development process and has become widely accepted across the industry. However, we believe that most clinical trials are still conducted using the traditional paper-based format. We believe the total annual market opportunity for EDC solutions is in excess of $1.4 billion.

    So, roughly speaking Medidata was sizing their annual opportunity based on 8,000-12,000 new trials per annum and eventual 100% penetration from what was then in their view sub 50% EDC market share in new trials. Now lets look at how the market leader and established public player at the time was sizing the same market. From Phase Forwards Nov 2009 Analyst day presentation:

    http://www.clinpage.com/article/medidatas_war_pathhttp://www.sec.gov/Archives/edgar/data/1453814/000119312509137131/d424b4.htm

  • As you can see, Phase Forward throws out about half the new trials with registered start dates in the given year, and only focuses on those with industry involvement to get at the commercially viable addressable EDC market. We can add that during our research speaking with multiple industry sources, we got similar feedback regarding the addressable EDC market. So, the trial market entering 2010 was about 4,250 trials at 60% penetration, or a total of 2,550 trials. The mid-point of their market size implies an average revenue per trial of roughly $170,000. So what does this market look like today? Well, if you go on clinicaltrial.gov and pull up the trials with industry involvement you can see that almost nothing has changed. You are roughly looking at the same lets call it 4k-5k commercially addressable market. The only difference is that the

    Market Sizing

    Trial Numbers clinicaltrials.gov June 2009

    Sizing the EDC Market

    Estimated 4,000 to 4,500 new trial starts per year represent the valid

    commercial EDC market

    Count of Rank Column Labels

    Row Labels 2007 2008

    Phase 0 71 64Phase I 1209 1366

    Phase I|Phase II 448 533Phase II 2171 2131

    Phase II|Phase III 230 266

    Phase III 1584 1599Phase IV 1271 1307

    (blank) 3640 4057

    Grand Total 10624 11323

    11,323 trials have 2008 start dates Of these 5,221 have Industry

    involvementCount of NCT ID Column Labels

    Row Labels 2007 2008

    Phase 0 11 14Phase I 756 938

    Phase I|Phase II 204 263Phase II 1262 1248

    Phase II|Phase III 106 92

    Phase III 1090 1056Phase IV 664 640

    (blank) 768 970

    Grand Total 4861 5221

    4,237

    Phase I

    through IV

    EDC Adoption and Growth

    Current market estimated at $400-450M1

    Estimated 60% of new studies use EDC

    Circa $800M to $1Bn fully addressable

    InFormis the market leading solution Continuing to increase share

    Site users prefer 3:1 versus competing systems2

    1. PF Internal estimates. Data from a number of internal and external sources including:

    Clinicaltrials.gov, public filings, press releases and internal company confidential

    information

    2. Source: Quintiles presentation, PF IUC, 27 October 2008

    3. Source: December 2008, Health Industry Insights #HI215874 and PFWD public reports

    Fully Addressable

    $800-1000M

    Current Mkt

    $400-450M

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    35%

    40%

    2006 2007 2008 2009

    Growth

    Rate

    PF v Market Growth

    Market Growth

    PF Growth

    YTD EDC

    Growth

    3

    8

  • penetration rate of EDC is now at about 70%. Doing the math on this gets you to a current market size of $535 million. So 8 years later the market size is roughly half what Medidatas CEO was calling it 2 years before the company went public. That being said we think you need to tweak things a bit to really get at the EDC market that Medidata and Oracle are playing in. We figure the ASP mix is a lot higher on the high-end which they dominate in large pharma, and that $250k x about 2,500 trials per annum makes more sense. This gets you to about $625 million. We believe the rest of the market for the smaller players who cant afford what Medidata is charging is worth $150 million per annum. Our research also indicates that as far as Medidata is concerned moving from paper to EDC has peaked out, and that share gains going forward on further EDC uptake are immaterial. So, how penetrated is Medidata in their core EDC market? Well, EDC revenues in 2013 were $210.1 million. Running the numbers that works out to roughly 40% penetration at the end of 2013. This number also jives with the market share numbers tossed around by most industry professionals as well as Medidatas own past claims on their EDC market share. We believe this number is probably closer to 45% today based on our own estimates of 2014 Rave revenues. Now lets look at how JP Morgan views this market. From JP Morgans December 9th, 2014 Medidata Research Report titled Medidata Analyst Day: Plenty of Growth Left

    Investment Thesis $14B market opportunity that is underpenetrated According to Clinicaltrials.gov, there are over 150,000 registered clinical trials currently under way around the world, and we believe this actually understates the total number because of the lack of registration from regions like India, China and South Korea. Our estimate of the clinical trials that MDSO supports is ~2,500, and even if the rest of the competition was estimated at 4x that number, it would still put the penetration of dedicated clinical trial software and technology at under 10%. We believe the majority of clinical trials are still conducted manually with the use of generic software like Adobe PDFs. But the increasing scrutiny and regulation, growing complexity, and improvements and dedicated solutions like those offered by MDSO for tasks ranging from electronic data capture (EDC) to study design, to auditing and analytics will likely drive that penetration rate above 50% over time.

  • This is pretty interesting comment. If you read it and do the math, Medidatas clinical trial penetration is at about 1.5%. Now this is a bit confusing as they have mixed and mashed the EDC element with the non-Rave broader eClinical opportunity, and basically come up with a total technology opportunity while essentially working off how EDC works on a per study basis. Lets just set that aside for now as we will get to the non-Rave addressable market after we are done with EDC, and focus on this flawed analysis as its quite telling about sell-side IQ on this name. First, according to clinical trials.gov there are NOT 150,000 registered clinical trials currently under way. In fact there are 92,447 studies in the database that are completed

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