Medidata: A Short Thesis Ticker: MDSO US Equity

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

Medidata’s Non-EDC Market Opportunity............................................................................... 5

Medidata’s ‘Non-Rave’ Products ................................................................................................... 8

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

Medidata’s 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 Medidata’s 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, “it’s the mother of all…..” Anyway, having been down this road once before, it didn’t take us too long to get up to speed. So, let’s get into it!

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

Very, BIG TAM….

Medidata’s $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 Medidata’s CEO from a 2007 interview:

“Medidata’s 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 let’s look at how the market leader and established public player at the time was sizing the same market. From Phase Forward’s Nov 2009 Analyst day presentation:

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 let’s 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

InForm™is 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 Medidata’s 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 can’t 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 Medidata’s 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 let’s look at how JP Morgan views this market. From JP Morgan’s 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, Medidata’s 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. Let’s 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 it’s 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 or slightly more than half of all the current number of registered studies. The ‘open ‘studies number is 55k, and if you screen down to industry related studies that number falls to 12k. Add in the closed but still active industry related studies and you get to just a little less than 20k. Anyway, this is kind of pointless yet extremely embarrassing for this analyst as the math around the EDC market has been well known for a while and can be confirmed by looking at old Phase Forward presentations, through Paraxel’s sourcebook, in Paraxel’s investor day presentations, can be bottomed up on clinicaltrials.gov by pulling new industry trials scheduled for a given year, and lastly confirmed through conversations with just about anyone with knowledge in the space. The reason we are poking at this here is because it’s another example of just how quickly rigor and reality are suspended when the SAAS tag is slapped on anything these days.

Medidata’s Non-EDC Market Opportunity While Medidata started out as a pure play EDC vendor, around 2011 they really started focusing on the broader eClinical trial market. This expansion came through acquisitions and internal R&D efforts, and we estimate that today non-Rave revenues account for nearly 30% of their business. Now, around mid 2012 Medidata started officially quantifying what they felt their new products added to their market. Here is what that looks like:

So, adding a coding application, CTMS, and patient randomization essentially quadrupled their market size. They of course have been light on details with respect to their market sizings around these new products. All our research indicates that the opportunity in 2012 and at present is a minute fraction of the $4.5 billion they quantified it at, but that’s kind of irrelevant now because the market has grown again.

Billion is clearly the new million in Vertical SAAS. Despite the fact that the EDC market is still less than half the size of what they pegged it at 8 years ago and also seemingly saturated, Medidata has managed to tack on $8.5 billion in new potential TAM over the past two years! So how do they come up with this new huge number? Well, apparently it’s all about ‘value add’. Basically, Medidata management has concluded that their platform creates roughly $40-$50 billion in ‘Value’ for the pharmaceutical industry, and that as a technology vendor they will ‘capture’ roughly 20% of that value creation (at least they didn’t project a 2% management fee on top of that!). Basically, estimate how much money you save in reduced development costs, reduced risk, and add in revenue upside from faster time to market and that’s your efficiency gain. Slap a multiple on that and you have the value creation for a pharma company, and then take a 20% performance fee on that and you have your addressable market opportunity. Suffice to say this approach didn’t exactly cut it for us. So, how does one go about sizing the non-EDC eClinical market? Well, to be blunt, you do a lot of research. We started out by going through everything that our friends the sell-side have put out on the name over the past five years, and then moved to anything we could find that was published in the public domain with respect to short/longs on the buy side. In both cases, we were very disappointed to discover that nobody had ever really dove into the broader eClinical opportunity let alone the individual product lines

involved. You almost come away thinking that this is a company that just went public in the last year, and the market has yet to develop the necessary IQ with respect to their non-EDC business (and as we just showed.. in many cases their EDC biz as well). Thus, we were left with no other choice but to do the work ourselves. To be frank we found this initially a lot more challenging than our experience with Veeva which is on the commercial side of pharma. Once you get outside of EDC, the eClinical market is initially a much more fragmented and confusing place. Just learning what all the acronyms stand for (IRT, IVRS, RTSM, RBM, CTMS, ECOA) was a challenge in of itself. Surprising when you consider that the extent of financial market knowledge on this $8.5 billion TAM or 85% of Medidata’s total market opportunity doesn’t extend much further than the simple ‘non-Rave’ revenue designation ascribed to it. So, let’s begin…….

Medidata’s ‘Non-Rave’ Products IRT IRT stands for Interactive Response Technologies. Historically, this acronym meant you were talking about either Interactive Voice Response Technologies (IVRS) or Interactive Web Response Technologies (IWRS) employed for patient randomization and drug supply management. Today, the top eClinical vendors simply call it RTSM or Randomization and Trial Supply Management. This generally refers to a SAAS based solution that also integrates tightly with existing EDC offerings. Mediadata’s solution in this space is called Balance and was introduced in late 2010. RTSM is easily the largest eClinical market behind EDC, and sizing it up is not very difficult. The segment was roughly worth about $150-200 million in 2008 with UK based ClinPhone holding roughly 30-35% market share. ClinPhone, after a bidding war with Quintiles, was acquired by Paraxel for $182 million. Today, we estimate that the RTSM market is worth $300-350 million (we’ve seen estimates as high as $450mln but that’s just not supported by our research at this time), and that Parexel’s share is roughly 40% of that. This estimate essentially agrees with the actual bottom-up RTSM revenue number of $105-$115 million you can figure out from Paraxel’s public financials. They don’t break out RTSM in the Informatics divisions numbers, but they do provide a break-out of the annual increase for it in the management commentary that allows you to get at the revenue number by working back to when the Clinphone acquisition was completed. As for characteristics of RTSM market, it can best be described as competitive. For example, BioClinica entered the space via a $2.1 million acquisition of Tourtellotte

Solutions in 2009, and a year later was able to sign GSK (resigned in 2014 after competitive process). BioClinica’s approach here includes fully hosted RTSM as well as technology transfer agreements. This is notable because it shows there isn’t exactly a ‘one size fits all’ cloud platform model being adopted in eClinical. The big pharma’s and CRO’s, especially for more commoditized products seem willing to enter into tech transfer agreements where they license the technology and get external help desk support from the vendor. This is not what you want to see if you are buying into the Medidata pitch that everyone will one day be buying a full SAAS eClinical suite from them. Outside of Paraxel and BioClinica you also have Oracle with offerings here, a company called Cendant which is a RTSM focused JV between Quintiles and Thermo Fisher, and a whole host of smaller players. We estimate Medidata RTSM application revenue at between $10-$15 million at the end of 2013. CTMS The Clincal Trial Management System market is made up of vendors who focus on providing financial and operational workflow software solutions for clinical trials. The market can be further broken down into site-specific CTMS and Enterprise wide CTMS systems. As far as Medidata and the major eClinical players are concerned, the focus is on Enterprise Wide CTMS. Site-specific CTMS is an even more niche market, but for those interested, the leader in the space is privately held Bio-Optronics. Their Clinical Conductor CTMS is currently deployed at over 1,600 clinical research sites world-wide. That being said our focus in this space is on the broader enterprise-wide CTMS offerings. The leaders in this space are Oracle with their traditional Siebel CTMS product and Paraxel Informatics with their IMPACT solution. Our research indicates that the general view is Oracle still holds a slight edge with the #1 slot in market share here. This disagrees with a June 2013, Parexel investor day presentation in which they explicitly state their IMPACT CTMS holds the #1 market share designation. As neither vendor publicly breaks out CTMS revenue its impossible to 100% verify this, but as far as we are concerned with respect to total market sizing this is pretty immaterial. This is because Parexel’s public disclosures, just like in RTSM, allow you to pretty much figure out that CTMS revenue is somewhere between $30-$45 million. If that’s #1 market share or close to it and the top 3 vendors control 60-80% of the market, then you can come up with a pretty decent estimate of what the current annual revenue opportunity is in CTMS. That number works out to a max of about $200 million, which is in the neighborhood of $300 million figure that Medidata attributed to this ‘opportunity’ when they bought Clinical Force in 2011. We estimate Medidata CTMS revenue at $8-$12 million at end of 2013. This is based off the calendar 2011 10-k disclosure of six month Clinical Force revenue at $500k ($1mln annual run rate), and their Q4 2013 conference call commentary that Clinical Force revenue had increased over 8x since they acquired it.

Now, what’s interesting about this segment is that the leaders seem to be doing fine, and also the smaller players are winning big pharma business. One excellent example of this trend is BioClinica’s enterprise-wide OnPoint CTMS deployment at Sanofi, a contract that was announced in 2012. A recent BioClinica press release points out that after a competitive process top-ten pharma renewed a multi-year enterprise agreement to use their OnPoint CTMS and also Express EDC. This stands out because Sanofi is using Medidata Rave, Coder, Safety gateway, and TSDV applications. The failure to displace a seemingly (we say seemingly because their momentum the last two years looks quite impressive) tiny upstart like BioClinica at one of your largest customers says a lot about the competitive state of the eClinical market. And for those looking for more evidence of this trend we offer Oracle’s CTMS related press release from last week. Here you can see that PPD, a top 5 CRO by revenue, is migrating their Siebel on premise CTMS to Oracle’s Health Sciences Cloud offering. If you dig even deeper here you will discover that some of the large players have even chosen to stick to upgrading their own in-house systems versus buying from one of the eClinical providers. So, again not only is the market quite small as far as revenue pie goes, but it is also hyper competitive with entrenched players and small upstarts both doing fine. This is pretty much the exact opposite of the picture that has been painted by those pushing Medidata shares on a broader eClinical displacement, let alone landslide eClinical displacement thesis. Trial Planning/Safety This is definitely the smallest of the eClinical segments at no more than $100 million in total annual revenue value. All the eClinical vendors have applications addressing some element of this segment. Medidata’s offerings in this space largely consist of a product suite they acquired when they bought Fast Track Systems in 2008. Their Designer protocol, Grants Manager, and CRO Contractor applications are the main offerings here. We estimate that these offerings coupled with their Coding and Safety Gateway application on the study conduct side contributed $20-$30 million in application revenue in 2013. RBM Risk Based Monitoring or Targeted Source Data Verification is something you hear a lot about in the clinical trial space these days. It essentially refers to a shifting approach with respect to clinical site monitoring 100% source data verification. While the FDA has never explicitly required 100% SDV, this generally developed as the de facto most effective data monitoring tool in clinical trials. With the technology available in the mid-80’s, this was implemented through regular site visits at 4-8 week intervals by clinical research associates. Despite technological innovation, not much has changed in the industry over the last 25 years. Consequently, the travel and man power related costs of continuous on-site monitoring and 100% SDV continued to grow. Last year it is estimated over $7 billion was spent on site monitoring for clinical trials. RBM is about the move to cut these costs while also improving trial risk management and overall monitoring. The public perception is

that the shift in this direction started in 2011 as the FDA green lighted the transition in a guidance paper (final guidance paper update was in 2013), but in truth a lot of RBM related practices like sampling have been employed by big pharma for many years. That aside, the core element of RBM is centralized statistical monitoring. This allows for cross-trial analysis and cross-site analysis of data, and subsequently more targeted site visits by the CRA’s as well as reduced trial risk for patients, as fraud or clinical problems are detected earlier. At the same time, pharma saves a lot of money on travel expenses and man hours which is always good. The centralized statistical analysis of site data will of course require software for the CRA to perform his monitoring. That’s where Medidata and the eClinical vendors all come in. Now the question is how big could this market be? Medidata says at least as big as EDC, while others view it as a much smaller opportunity because of the CRO interplay here. Basically, the CRO’s are going to be losing top-line revenue from the decreased on-site monitoring, and thus view RBM as a long-term internal margin improvement opportunity. There is no doubt about this broader trend in the space as you can see the CRO’s becoming more like tech companies via vertical integration, but it is even more pronounced in RBM which hits at the heart of a core business process they typically have been providing as contract research outsourcers. The big four (Covance, Icon, Quintiles, and Parexel) all have their own technological platforms (Xcellerate, Iconik, Infosario, Mytrials) to address RBM, and considering their ever increasing share of clinical trials stand to benefit the most. This view is also consistent with recent CRO management comments about RBM not being a meaningful revenue contributor. The rationale being that for the CRO’s RBM is a margin expansion opportunity as they drive costs down faster than the lost revenue from reduced on-site monitoring. Basically, this is a tremendous opportunity for them to capture a bigger slice of the profit pie in running clinical trials. The other issue we see here is that this is not 2009. CRO technological vertical integration is only one part of the problem. The other is that all the other eClinical vendors are not asleep at the wheel here. Medidata’s purchase of, 2013 founded data visualization analytics monitoring provider Patient Profiles to bolster their capabilities in RBM is not unique to them. BiolClinica for example recently purchased RBM platform provider Blueprint Clinical, and has been just as active in thought leadership/marketing around their RBM solution with big pharma. Notably, they have been doing several presentations with Bohringer Ingelheim around their new Compass RBM solution. You also have the issue that this market lends itself to the pure statistical analysis vendors like SAAS and everyone else with BI expertise. So, to be perfectly clear at day zero the market is already hyper-competitive. With this in mind we think a best case scenario here for Medidata would be $30-$50 million in centralized statistical monitoring related revenue a few years down the road in what looks like a $200 million max opportunity by 2020. If you are excited about RBM, the CRO’s are the way to play it, not Medidata.

Patient Cloud/mHealth At the intersection of Big Data, Cloud, and Wearables lane is where you will find Medidata’s most talked about greenfield market opportunity, the mHealth space. Electronic reported patient outcomes have been around for a while, and there are plenty of players in the space. What Medidata is pushing here is a more simplified approach (via their mobile app) to ePRO to get around the costs and complexities that have typically slowed adoption. Again there is a lot of activity here, and the typical regulatory guidance issues with ePRO to contend with. The real buzz-word right now is mHealth and wearables. Medidata has partnered up with Garmin to link their Vivofit activity tracker to their clinical cloud, and has recently completed a mobile patient engagement study linking wearables to their clinical cloud with GSK. There is no doubt Medidata is forward thinking here, but when it comes to mHealth there are a lot of players beyond the usual suspects in eClinical that have big aspirations. A notable example would be Qualcomm with their 2net platform. Basically, Qualcomm has created universally interoperable cloud-based biomedical network that enables mobile devices to serve as gateways. Qualcomm are working hard to drive traffic to the 2net platform. Then you have Apple and all the buzz around iWatch and their embedded HealthKit and ResearchKit; and there are plenty of other players out here. Pretty much everyone in wearables as well as a list of startups a mile long are all looking to make a name in this market. Anyway, Medidata is calling this a potential $1 billion dollar opportunity down the road, but at this stage it’s too unclear to tell how it all plays out. Some people we talked to viewed it as a nice booster down the road while others have argued this could turn into an existential threat as more nimble players shake things up while the big mobile players carve up the platform and hardware pie. So, there you have it, that’s what the broader eClinical market looks like these days. Now we will add that when it comes to non-Rave there are some things that remain a little unclear to us. Essentially our conversations, exhaustive online research, and financial analysis all indicate that Medidata’s progress in CTMS and RTSM is minimal. This is notable because those products are catered to really well defined separate segments as far as revenue opportunities go. Which makes you start wondering whether product density numbers they have been reporting are not a somewhat misleading indicator of actual non-Rave eClinical progress. For example, how many Rave customers are also using Rave Safety Gateway? We ask because this can almost be classified as an EDC ‘add-on’ rather than a mature separate eClinical segment. Anyway, just something that occurred to us while going through all this which also would comport with the increasing lack of disclosures around non-Rave revenue. Putting It Altogether So, doing the math here you have $600-$700 million for EDC, $300-$350 million for RTSM, $200 CTMS, $100 million for trial planning/safety, and greenfield that could be a potential $200 million separate pie in RBM. This adds up to a $1.40-$1.55

billion TAM, and you can take that up to $1.7-$1.9 billion if you add in the last two crowded and mature eClinical segments of medical imaging and regulatory information management which Medidata is not really playing in. This is a far cry from their $10 billion TAM. If you really want to get granular, the current non-EDC revenue opportunity on an annual basis in Medidata’s product lines is about $600-$750 million. That’s a mind boggling 1/12th of the $8.5 billion number being tossed around. Let’s be clear, this is not ground breaking news to anyone in this market. Parexel and other independent research organizations size the broader eClinical market opportunity at less than $2billion with EDC accounting for nearly half of that pie.

And this is coming from the broader eClinical suite leader….

Profitability Improvement Opportunities & Cases Strategic Direction Overview Market Dynamics

Double Digit Market Growth Continues

10-11% growth

Main growth drivers are

process outsourcing and

retirement of in-house

systems

All major segments are

growing

Market scope likely to

expand $0

$400

$800

$1,200

$1,600

2010 2011 2012 2013 2014

$1,000

$1,100

$1,210

$1,343

$1,491

Mil

lio

ns

eClinical Market Size

Source: Wells Fargo estimates 2010 market size at $1B (April 2011). Management estimates of growth rate.

Parexel Informatics management clearly needs to hire some of Medidata’s ‘value engineers’, because they seem to be blind to about $8 billion in potential annual revenue within a market they dominate. But what do they know, they are just a top global CRO which also publishes the leading R&D statistical sourcebook for the entire biopharmaceutical industry. Basically, Medidata’s management wants you to ignore industry reality and just focus on the potential ‘value add capture’ of getting blockbuster drugs to market. Throw in buzz-words like cloud, SAAS efficiency, big data, value engineering, and you are good to go. This is how the game is played these days. Are we being too critical? We don’t think so. Medidata is no doubt doing some very innovative things, and you have to be impressed with the brand equity they have built. However, these numbers and how they get to them are just plain ridiculous.

Profitability Improvement Opportunities & Cases Strategic Direction Market Dynamics Overview

#1

#1

#1

#1

#3

#1

From Leading Applications

Mark

et

Sh

are

Clinical Trial Management –

IMPACT

to reduce

complexity, costs

and risks

Accelerate

decisions and

timelines of

clinical trials

E-Patient Reported Outcome

(Voice/Web )

Randomization & Trial Supply

Management – Clinphone

Medical Imaging

E-Data Capture – DataLabs

Regulatory Information

Management

But don’t worry there is a simple explanation for this Vertical SAAS TAMitis. All you need to do to understand it is look at the deals done in Life Sciences IT over the last decade Life Sciences IT Related M&A

Deal Space Year Takeout EV/Sales Multiple

Oracle/Siebel CRM/Vertical Specific/Large LS Biz

2005 2.7x

Cegedim/Dendrite LS CRM 2007 1.6x Medidata/Fast Track Trial Planning 2008 3.3x Parrexel/Clinphone eClinical

IVRS/RTSM 2008 2x

Phaseforward/Clarix RTSM 2008 3.4x Oracle/Phaseforward EDC/eClinical 2010 2.7x Parexel/Liquent Clinical Reg Inf

Mgmt 2012 1.8x

Accelrys/Qumas ECM LS 2013 2.5x JLL/Bioclinica eClincial-

CTMS,EDC,RTSM 2013 1.4x

IMS/Cegedim LS CRM/ Customer MDM

2014 0.9x

That’s 10 acquisitions over the last decade all at less than 4x EV/Sales takeout multiples with the average clocking in at 2.2x. This is not exactly encouraging news if you are trading at 8x-13x trailing sales and already showing signs that you have fully penetrated your core product’s market. The inevitability of your multiple imploding is staring you in the face everyday, and thus you have no choice but to do everything in your power to convince investors that your TAM is essentially doubling every couple of years. It’s a race against vertical valuation reality, and one that these management teams are doomed to lose no matter what they do because of how badly the market has mispriced them in this SAAS-mania. For those that have any doubt about our TAM analysis, we simply offer the below slide.

This is from a Summer of 2011 Medidata presentation. As you can see they break out the entire eClinical market which they peg at $2 billion. Not exactly spot on with what its value was back then, but definitely a much more grounded in reality number. So what’s changed since this presentation? Did they add a lot of new product lines? Well, to be frank the answer is not much. This presentation was given at the time of the Clinical Force CTMS acquisition, so the only notable change since then would be the recent Patient Profiles purchase for the RBM market. Thus the only conclusion left to draw here is that the broader eClinical market has experienced a 70%+ CAGR over the last three years. As that is clearly not the case, we offer a more plausible explanation. At the beginning of 2012 Medidata traded at a sub 2.5x EV/Sales multiple. As revenue growth accelerated on the back of some Oracle displacements as well as successful non-Rave portfolio penetration off a tiny base, that multiple increased by a factor of 5 over two years. Now, while we’d argue the bulk of this expansion was driven by SAAS-mania, you can’t be walking around with a $3 billion market capitalization and saying your entire addressable market is less than $2 billion, $1 billion of which can be ascribed to 7 niche sub-segments that are highly fragmented and extremely competitive. You don’t need a CFA to figure out what 40% share of a $2 billion market means for a $3 billion market cap stock. But a potential 40% of a $10 billion and growing market is different story. In that case, your stock could eventually more than double over time.

Honestly, diving into Medidata Shares on the back of the $10+ billion TAM being thrown around is the equivalent of doing this…..

Anyway you get our point, now onto some industry research.

Industry Findings

We believe performing thorough on the ground research is essential part of the strategic investment process, and it is even more integral piece when you intend to share your views on a stock in a public forum. When such research is related to a long investment thesis sharing it is pretty straightforward, but when you are dealing with a short, things are a little more difficult. Normally, this requires doing a lot more summary of general findings versus sharing quite specific quotes that in some cases would immediately be interpreted as earth shattering. A short-seller sharing an anonymous quote that bolsters his short thesis is going to have his fair share of doubters which is why limiting such quoting is our general preference. However, in Medidata’s case we discovered that someone else has already published an industry specific findings report that consists of extensive quotes from one-on-one interviews they performed. This report is available online, and comes from a very reputable independent research firm called Blueshift Research. Their findings are completely in-line with what our own research discovered, and thus we felt highlighting some of them here would be helpful. Just to be clear, we have no relationship with Blueshift Research nor have we contacted them regarding this report. We simply came across it online, and it is consistent with what our own research has uncovered. Consultant and Medidata User advising CROs and pharmaceutical clients:

“Medidata’s prices are too high, and this a threat to getting smaller companies. I worked at a smaller company that used Medidata, and we had to eventually look at the other options. The smaller options can beat Medidata on all fronts for price and service.”

“Rave platform is most mature product. Rave doesn’t usually break. Once you get your study built, it will run pretty well. However, the Medidata CTMS is very buggy.”

“Medidata remains on top because they’re innovative and also have great marketing. They are really good at marketing themselves. They’re like the Apple of this Industry”

Biostatistics and data manager at a South Central pharmaceutical company:

“Their pricing is quite expensive and is based on different phases of a trial over the course of a few years. But most companies don’t plan that far in advance. And the price goes up if you don’t meet a certain number of trials. The price can be very daunting over the course of a study.”

“Where their growth will come from is a good question. Big pharma has deep pockets, but unfortunately there are a lot of midsized companies. Medidata has priced themselves out of that particular segment.”

“A small company cannot buy software data management if the price is set too high. When I worked at another company, Rave was 20% to 30% of the entire cost of the study. This was unexpectedly high. Companies set a study budget, and it is hard to increase the proportion of money they will spend. It is also costly to advertise and get patients in the trials, so this cuts into the budget too. The high cost of software slowed down enrollment”

Clinical trial manager with pharma and medical device clients throughout Europe:

“The only driver at the moment in clinical trial management is financial. Companies are getting less and less money to perform studies, so they are looking to do them as cheaply as possible. No one is going to use suites or bundles of tools; it would be too expensive.”

Business development director in clinical trial management and software:

“I have not seen anybody taking the mobile solution to the EDC arena- a lot of talk about it but no implemented solutions. Maybe because a lot of the barriers in the academic sites, barriers with FDA guidance, etc. Mobile isn’t mature enough yet.”

Director of an open-source software company:

“Medidata’s niche has been the large pharma companies where they offer a huge robust solution that is very expensive, when the rest are doing small research- some of the CROs or academic organizations- don’t have that kind of funding, they’re looking for another solution.”

“Medidata has to move downward or there is nowhere to go. They have to change their model and their offerings…”

VP of a competitor:

“Advantages are they’re the market leaders. People go to them as the big players in the market. They are doing interesting things with data integration where they look at trends, such as indicators of a trial going well. The publish those and use that data for thought leadership and content marketing. Disadvantage: Their pricing model is very expensive when price pressure is going down, not up. EClinical will become cheaper over time.”

President of a top 10 competitor:

“It’s always been a competitive market, but it’s getting more competitive in the upper tier. There are 40 or 50 EDC companies that do what we do. The top four to five are getting the lion’s share of the business, but the number of companies is going down to mergers or going out of business.”

Large technology company’s director of life sciences consulting to pharma clients:

“Medidata is making headway in terms of market share within EDC arena. They are seeing some success with their coding application but making little headway with CTMS or IVRS. Their traction in these areas within large pharma is very limited.”

“Big pharma has, until recently, ignored these smaller players, but we are seeing increased interest by big pharma in smaller software providers. An example is in the EDC where smaller players like Datatrak, Merge and Datalabs are getting increased traction that we didn’t see before within big pharma. There are probably 10 smaller players out there, but they don’t yet have a large pharma pedigree. Their market tends to be the midsize and smaller pharma companies, biotechs and medical device companies.”

Manager of clinical data for several companies, including Medidata:

“It’s a pretty competitive market right now, but it is not a super-big industry. It is really a small niche market.”

“We are paying one-third to one-half the price for our current software than we paid for Medidata. It’s the same set-up time. It doesn’t always work the way we want it, and Rave has all the bells and whistles.”

“Medidata dominates the EDC market and will continue to do so, but it is close to saturation.”

Clinical data management consultant with 25 years’ experience:

“I’ve some bids, and Medidata was four to five times higher than competitors. Their bid for a Phase III trial of four to five months duration was $350,000 versus $50,000 to $75,000 for the same service. We didn’t need the bells and whistles of their system.”

“A small provider said to me that he could pretty much match them feature for feature but he couldn’t spend enough on advertising to get the name recognition Medidata has.”

We think Rave’s hefty price tag is one of the bigger takeaways from the Blueshift piece and our conversations that we really have not covered in detail in this report. The fact that this is literally the first thing you hear about Rave when you talk to anyone gives you pause. Rave pricing has been a lever that Medidata is clearly not very shy about pulling, and that looks like its hit a tipping point. Banking on large pharma paying any price for what is now perceived as a commodity product in EDC

because they won’t bother considering smaller players seems very risky from here on out. If the resounding view is that Medidata’s opaque pricing model has pushed the limits, its tough to get excited about the idea of customers feeling compelled to give them more eClinical product share. In fact, the obvious argument is that Medidata’s pricing strategy around Rave has incentivized big pharma to deal with smaller players and maintain a more balanced market. Evidence of momentum on the smaller eClinical player side is clear and supports this view. Bioclinica announced 51% eClinical revenue growth in 2014, and OmniComm has made unbelievable progress getting the top CROs to adopt their TrialOne Suite for Phase I AUTOMATION. Here are just some of their PR’s over the past 12 months… OmniComm Systems TrialOne Suite Selected By Icon for Phase I Clinic Automation OmniComm Systems® Announces 141% YOY Growth in Total Contract Value Top 10 Pharmaceutical Company Moves to OmniComm Systems’® OmniCloud Leading Biotechnology Company Selects OmniComm Systems’® TrialMaster® OmniComm Systems® Signs Multi-Year Agreement with Top 5 Global CRO for TrialOne® Multi-Billion Dollar Global Contract Research Organization Selects OmniComm Systems’® TrialMaster® The progress of smaller players in the last year is undeniable. The traditional view that large pharma is off-limits to these guys is quickly collapsing Outside of the EDC pricing commentary we think the quotes reveal pretty much what we have pointed out throughout the report. A core market that is saturated and dominated by top 20 pharma, and a broader eClinical market that is a lot more competitive and in which there is both limited traction and a very finite opportunity. Thought leadership and marketing are strengths, so is reliability for top pharma, but cost considerations remain a main focus for everyone.

Medidata’s Vertical Valuation Reality Valuing Medidata at this point is a pretty straight-forward exercise. We estimate they generated $201 million in Rave related subscription revenue last year.

This table gives you the total splits with professional services revenue included based on Medidata disclosures through 2013.(The 2014 splits are estimates based on our own research)

And this table provides you a split of the subscription revenue numbers based on our own research, and Medidata disclosures.

Now if you look at these numbers vs the TAM you see just how ridiculous this is:

2010 2011 2012 2013 2014*

Revenues $166.0 $184.0 $218.0 $277.0 $335.0

Yr/yr change - 11% 18% 27% 21%

Non-Rave Rev $ 8.7 $ 13.2 $ 31.1 $ 66.5 $ 94.0

Yr/yr change - 52% 135% 114% 41%

Rave Rev $157.3 $170.8 $186.9 $210.5 $241.0

Yr/yr change 9% 9% 13% 14%

*Split of Non-Rave/Rave is based on our estimates

2011 2012 2013 2014 2015(e)

Sub $ 144.4 $ 171.6 $ 228.0 $ 280.0 $ 342.0

Yr/yr change - 19% 33% 23% 22%

Rave Sub $ 133.2 $ 144.6 $ 173.3 $ 201.0 $ 236.0

Yr/yr change - 9% 20% 16% 17%

Non-Rave

Sub $ 11.2 $ 27.0 $ 54.7 $ 79.0 $ 106.0

*all Sub/Rave Sub/Non-Rave Sub splits are our own estimates

We had to do some work to get at the 2014 numbers and 2015 estimates because Medidata has decided to no longer break out non-Rave revenue, but we are generally pretty comfortable with what we have based on management’s past and present commentary on Rave’s application service revenue growth rate. The most recent example of this commentary can be found in this exchange from the Q4 2013 conference call in February: Glen J. Santangelo - Crédit Suisse Thanks. Just two quick ones. Tarek I was kind of curious if you can give us maybe a little bit of a better sense for maybe how much the core EDC product is growing, I mean you are all helpful in giving us a bunch of statistics about the cross selling that you have been able to achieve, but could you give us a sense for how fast Rave maybe growing at this point? Tarek A. Sherif - Chairman and CEO I’m not coming off what we said historically and it’s right in the range it’s at 15% to 20% in any given quarter it maybe a little bit higher it doesn’t really drop below the 15% range, but it’s been right in that sort of high teens, sometimes as high as 20% growth. And if you look at the market, if you look at our new opportunities again we see that perpetuating out for as far out as we have visibility. We’ve got plenty of EDC deals or competitive deals that may actually even bump that growth rate a little bit higher than the range we’ve seen, but certainly we’re comfortable with the range we provided. This color is important because you get a good idea of just how quickly non-Rave revenue growth has slowed. This is not surprising when you consider the size of the broader eClinical market, its fragmented nature, and increasing price sensitivity in the space that we have covered in detail. However, we’d argue that most long

only investors in the name don’t appreciate this fact as nobody covering the stock has bothered to do anything but regurgitate management’s ever expanding TAM story. So, what’s Medidata really worth? When you account for the existing high penetration and current growth rate of Rave subscription business, we cannot envision any strategic or financial player paying over 5x trailing subscription revenue for it. Thus we value the EDC application business at a max of $1 billion. Adding $220 million in net cash and $55 million in professional services revenue gets you to $1.28 billion. That means the non-Rave business presently accounts for approximately 54% of the value of Medidata or $26 a share. This is astounding for multiple reasons. First, at nearly $1.5 billion that is greater than the current annual revenue opportunity of the whole eClinical market including EDC as well as the sub-segments Medidata has zero exposure to. Second, Medidata is no longer providing any transparency on this part of their business, which is essentially accounting for the bulk of their current market value. To put this in perspective you are basically paying 18x sales for the non-Rave business. This is remarkable when you consider where Splunk, ServiceNow, Fireye, Tableau, and Workday are trading relative to their growth rates and addressable market penetration. Essentially outside of Veeva’s non-CRM revenue related biz, this is the most expensive piece of pie you can buy in cloud software land. Should this little eClinical software slice be the most valuable real estate in SAAS land? We think a generous multiple on non-Rave sub revenue at this point would be 8x. Applying such a multiple gets you to a $32 price for the stock or roughly 35% below where it is trading today. Remember, this is a ‘fair value’ based on 8x trailing for the non-core product portfolio of a vertical provider whose transparency and operating metrics are all going in the wrong direction. So, we think a discount is warranted that would leave Medidata’s enterprise value at roughly the current size of the eClinical market annual revenue pie. That price works out to $27 a share. A long-term investor looking to bet on what will likely be a long and uncertain journey towards the goal post set by management would probably want to come in with at least a 20-25% discount to that price. Putting this all together we expect the stock to decline roughly 45% from here over the next 6-12 months. Some Red Flags To Focus On

1) In q4 of 2013 Medidata stopped providing quarterly revenue guidance. In Q1 of 2014 they stopped breaking out non-Rave revenue. Since then, they have

missed consensus twice. The most recent instance coming just two months after they set 2015 guidance at their analyst day.

2) Average Product density, a measure of their non-rave product adoption has really started to flatline. This trend becomes much more evident when you look average product density for multi product customers.

3) Changing key metrics calculation like Application Back-log coverage of annual guidance. The metric has been broadened to include expected intra-year renewals when the previous reported metric excluded such expected renewals. The coverage number is 82% vs a comparable number for last year that we estimate at 83-84%. Again, not what you want to see.

4) Their head of enterprise sales recently left to join Veeva. These red flags are occurring within the context of increasingly optimistic management commentary as well as an ever expanding market revenue opportunity. That in of itself is another red flag. We can tell you this is par for the course for when a growth story morphs into growing pains. One time FX hits, slightly delayed large mega deal signings (“we are on the 1 yard line”), more then usual back end loaded guidance (2nd yr in a row), and essentially completed but not technically recognizable professional service revenue become the topics of conversation on conference calls. All the while the CEO tells you the business is better than it has ever been instead of trying to temper expectations (for those looking for a played out version of this see Commvault conf calls from summer of 2013 to spring 2014). This is now the story at Medidata. Management has made it nearly impossible to be long the stock here. Instead of using very conservative addressable market numbers, and letting their non-Rave revenue momentum speak for itself; they have adopted huge completely out of whack with the rest of the industry numbers coupled with growth rates that simply doesn’t compute at such a seemingly low TAM penetration. It’s at this point that investors like us break out the

microscope, and start to ask questions to explain this anomaly. How can this be an $8.5 billion market, and their momentum has fallen off so quickly? Why are tiny competitors winning big pharma business against this supposed juggernaut? What are we missing here? These types of questions don’t get asked when management is systematically keeping expectations firmly grounded in reality, and letting their business speak for themselves. And it’s in this gap between perception and reality that the best short opportunities are usually found.

Parting Thoughts on Vertical SAAS in General Our views on the cloud space have been gradually evolving, but what is becoming increasingly apparent is that software is being commoditized. Platforms and Infrastructure as a service are the main culprits here. That hasn’t been an issue so far, but we expect it to become clearer in the months and years ahead. Barriers to entry have become low, and outside of security and big data analytics we just don’t see many big beneficiaries. When it comes to traditional vertical providers the future is even more disconcerting. We simply don’t see pricing power in this segment going forward. If you want to make money in cloud, PAAS and IAAS providers are the way going forward. A major market valuation reset could change our view here, but for now this is a no brainer. If you are a long only investor the one sector you should continue to steer clear of is the Vertical SAAS plays. They are currently the ultimate growth investor trap. Vertical SAAS stocks are supposed to be about a better margin profile story within a tightly defined addressable market opportunity. Instead, with SAAS-mania being what it is, management teams have succumbed to market pressures and adopted the ever growing addressable market opportunities moniker often associated with their horizontal peers. This is a fundamental contradiction in the business model. We have now on two separate occasions demonstrated just how easy this is to debunk. This is why shorting Vertical SAAS stocks trading at Horizontal SAAS revenue multiples is such an attractive risk/reward proposition. You don’t need to find fraud or bet on technological obsolescence. In fact, you are targeting similar returns in solid well run businesses that simply are not what they appear to be. It is essentially robust value investing done from the short side, and the market is clearly starting to catch on to this.

Conclusion Medidata is a clear leader in the eClinical space, and there can be no doubt that their management team led by their entrepreneurial co-founders have executed

unbelievably well over the past decade. That being said the eClinical market is clearly a fraction of what management has recently pegged it at, and recent data points are evidence of a shifting tide. Medidata’s commanding position in EDC, and pricing strategy seems to have opened the door to smaller vendors in the traditionally conservative large pharma space. BioClinica’s 51% eClinical revenue growth in 2014 as well as competitive top ten wins in CTMS and RTSM supports this view. So does OmniComm’s very recent success at signing multiple top CRO’s on their phase I My Trial platform. If Medidata can’t displace tiny little BioClinica’s CTMS at one of their largest EDC customers like Sanofi, why should anyone be buying into full 3x-4x opportunity at full product density pitch? We also think technology transfer agreements with small eClinical companies in EDC and RTSM segments say a lot about the degree of leverage a large vertical SAAS player like Medidata has in the space. Is the pure subscription model a shoe-in in pharma? Recent deal activity would indicate that all you can eat technology licensing for things like RTSM and EDC is alive and well in the hosted application world. Also, it is clear that while one could have argued compellingly that large pharma’s natural incentive to have multiple competitive vendors in EDC and broader eClinical, was a potential headwind Medidata would eventually face; clear evidence supporting this thesis was limited. That is no longer the case. If anything it would appear that Medidata’s pricing strategy in EDC has sparked a bit of a shift that is benefiting the smaller vendors. Combine this trend with the CRO’s increasing clinical trial share and their desire to capture eClinical revenue for themselves, and you have what amounts to a much tougher competitive landscape going forward. Considering all of the above, we see nowhere for the stock to go but down from here. The neutral risk/reward balance point on the stock is simply far lower than the current $49+ share price. In closing we’d like to make one final point, actually it is more of a request. We would like Medidata to start disclosing non-Rave revenue again, and actually break it out by eClinical product line. Investing is about making an informed decision. We see no reason not to share this information if management believes 85% of their TAM is in these products. In fact, logic dictates that this is precisely the segment that management should be providing the greatest degree of transparency on as it would be used by any investor looking to measure their performance going forward. The action they have taken of reversing course and reducing disclosures on these segments as they simultaneously ascribe ever increasing market value to the segment is simply unacceptable.

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