Medidata: A Short Thesis
Post on 22-Dec-2015
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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:
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
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
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
2. Source: Quintiles presentation, PF IUC, 27 October 2008
3. Source: December 2008, Health Industry Insights #HI215874 and PFWD public reports
2006 2007 2008 2009
PF v Market Growth
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 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 Paraxels sourcebook, in Paraxels 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 its another example of just how quickly rigor and reality are suspended when the SAAS tag is slapped on anything these days.
Medidatas 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 thats 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 its 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 didnt 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 thats 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 didnt 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 Medidatas total market opportunity doesnt extend much further than the simple non-Rave revenue designation ascribed to it. So, lets begin.
Medidatas 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. Mediadatas 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 (weve seen estimates as high as $450mln but thats just not supported by our research at this time), and that Parexels share is roughly 40% of that. This estimate essentially agrees with...