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 8,00012,000 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:

Market Sizing T rial N umbers

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
11,323 trials have 2008 start dates
Count of Rank
Row Labels
Phase 0
Phase I
Phase I|Phase II
Phase II
Phase II|Phase III
Phase III
Phase IV
(blank)
Grand Total

Column Labels
2007 2008
71
64
1209 1366
448
533
2171 2131
230
266
1584 1599
1271 1307
3640 4057
10624 11323

Of these 5,221 have Industry

involvement
Count of NCT ID
Row Labels
Phase 0
Phase I
Phase I|Phase II
Phase II
Phase II|Phase III
Phase III
Phase IV
(blank)
Grand Total

Column Labels
2007
11
756
204
1262
106
1090
664
768
4861

2008
14
938
263
1248
92
1056
640
970
5221

4,237
Phase I
through IV

EDC Adoption and Growth

Current market estimated at
$400-450M1

Fully Address
$800-1000M

Estimated 60% of new studies use

EDC

Current Mk
$400-450M

Circa $800M to $1Bn fully

addressable

InFormis the market leading

As yousolution
can see, Phase Forward throws out about half the new trials with registered

competing systems2

Growth Rate

start dates in the given year, and only focuses on those with industry involvement
to
40%
to increase
get at the Continuing
commercially viable
addressableshare
EDC market. We can add that during
our
35%
research
speaking
with
multiple
industry
sources,
we
got
similar
feedback
30%
Site users prefer 3:1 versus
regarding the addressable EDC market.
25%

PF v Market Gro

20%

15% or a
So, the trial market entering 2010 was about 4,250 trials at 60% penetration,
10%
total of 2,550 trials. The mid-point of their market size implies an average revenue
5%
per trial of roughly $170,000.
0%

So what does this market look like today?

1.
2.
3.

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

2006

Well,
if you go
onfilings,
clinicaltrial.gov
pull
up the
trials with industry involvement
Clinicaltrials.gov,
public
press releases andand
internal
company
confidential
information
you
can
see that
almost
nothing
has
changed. You are roughly looking at the same
Source:
Quintiles
presentation,
PF IUC,
27 October
2008
Source:call
December
2008, Health
Industry Insights #HI215874
and PFWD market.
public reportsThe only difference is that the
lets
it 4k-5k
commercially
addressable
8

2007

2008

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 the
actual bottom-up RTSM revenue number of $105-$115 million you can figure out
from Paraxels public financials. They dont 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). BioClinicas approach here includes fully hosted RTSM as well
as technology transfer agreements. This is notable because it shows there isnt
exactly a one size fits all cloud platform model being adopted in eClinical. The big
pharmas and CROs, 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 Parexels public disclosures, just like in RTSM, allow you
to pretty much figure out that CTMS revenue is somewhere between $30-$45
million. If thats #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, whats 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 BioClinicas 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 Oracles 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 Oracles
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. Medidatas 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-80s, 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 CRAs 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. Thats 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 CROs 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 CROs 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 CROs 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. Medidatas 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 CROs 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
Medidatas 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 its 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, thats 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 Medidatas 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 Medidatas product
lines is about $600-$750 million. Thats a mind boggling 1/12th of the $8.5 billion
number being tossed around.

Double Digit Market Growth Continues

Lets 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.

eClinical Market Size

$1,600

$1,491
$1,343

$800

Main growth
process outs
retirement of
systems

$400

All major seg

growing

$1,210
$1,200

$1,100
$1,000

Millions

10-11% grow

$0
2010

2011

2012

2013

2014

Market scop
expand

And
thisWells
is coming
from 2010
the market
broader
eClinical
suiteManagement
leader. estimates of growth rate.
Source:
Fargo estimates
size at
$1B (April 2011).
Overview

Market Dynamics

Strategic Direction

Opportunities & Cases

From Leading Applications

#1

Clinical Trial Management

IMPACT

Market Share

#1

Randomization & Trial Supply

Management Clinphone

#1

Medical Imaging

#1

to reduce
complexity,
and risks

E-Patient Reported Outcome

(Voice/Web )

#3

E-Data Capture DataLabs

#1

Overview

Accelerate
decisions a
timelines of
clinical trial

Regulatory Information
Management
Market Dynamics

Strategic Direction

Opportunities & Cases

Parexel Informatics management clearly needs to hire some of Medidatas 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, Medidatas 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 dont 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.

Profita

But dont 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
Oracle/Siebel
Cegedim/Dendrite
Medidata/Fast Track
Parrexel/Clinphone
Phaseforward/Clarix
Oracle/Phaseforward
Parexel/Liquent
Accelrys/Qumas
JLL/Bioclinica
IMS/Cegedim

Space

Year

CRM/Vertical
Specific/Large
LS Biz
LS CRM
Trial Planning
eClinical
IVRS/RTSM
RTSM
EDC/eClinical
Clinical Reg Inf
Mgmt
ECM LS
eClincialCTMS,EDC,RTSM
LS CRM/
Customer MDM

2005

Takeout
EV/Sales
Multiple
2.7x

2007
2008
2008

1.6x
3.3x
2x

2008
2010
2012

3.4x
2.7x
1.8x

2013
2013

2.5x
1.4x

2014

0.9x

Thats 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 products 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. Its 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 whats 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 wed argue the bulk of this expansion was
driven by SAAS-mania, you cant 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 dont 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
Medidatas 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:
Medidatas 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 doesnt 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 theyre innovative and also have great
marketing. They are really good at marketing themselves. Theyre 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 dont plan that far in
advance. And the price goes up if you dont 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 isnt
mature enough yet.
Director of an open-source software company:
Medidatas 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- dont have that kind
of funding, theyre 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 theyre 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:
Its always been a competitive market, but its 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 lions share of the business, but the number of
companies is going down to mergers or going out of business.

Large technology companys 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 didnt see before within big
pharma. There are probably 10 smaller players out there, but they dont 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:
Its 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. Its the same set-up time. It doesnt 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:
Ive 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 didnt 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 couldnt spend enough on advertising to get the name
recognition Medidata has.
We think Raves 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 wont bother considering smaller players seems very risky from here
on out. If the resounding view is that Medidatas 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
Medidatas 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 PRs 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.

Medidatas 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)

2010
$166.0
$ 8.7
$157.3

2011
2012
2013
Revenues
$184.0 $218.0 $277.0
Yr/yr change
11%
18%
27%
Non-Rave Rev
$ 13.2 $ 31.1 $ 66.5
Yr/yr change
52%
135% 114%
Rave Rev
$170.8 $186.9 $210.5
Yr/yr change
9%
9%
13%
*Split of Non-Rave/Rave is based on our estimates

2014*
$335.0
21%
$ 94.0
41%
$241.0
14%

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

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

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

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 managements past and
present commentary on Raves 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 - Crdit 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
Im not coming off what we said historically and its right in the range its at 15% to
20% in any given quarter it maybe a little bit higher it doesnt really drop below the
15% range, but its 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. Weve got plenty of EDC
deals or competitive deals that may actually even bump that growth rate a little bit
higher than the range weve seen, but certainly were 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, wed argue that most long

only investors in the name dont appreciate this fact as nobody covering the
stock has bothered to do anything but regurgitate managements ever
expanding TAM story.
So, whats 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 Veevas 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 Medidatas 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 intrayear 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 doesnt compute at such a seemingly
low TAM penetration. Its 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 dont get
asked when management is systematically keeping expectations firmly
grounded in reality, and letting their business speak for themselves. And its
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 hasnt 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 dont
see many big beneficiaries. When it comes to traditional vertical providers the
future is even more disconcerting. We simply dont 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 dont 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. Medidatas commanding position in EDC, and
pricing strategy seems to have opened the door to smaller vendors in the
traditionally conservative large pharma space. BioClinicas 51% eClinical revenue
growth in 2014 as well as competitive top ten wins in CTMS and RTSM supports this
view. So does OmniComms very recent success at signing multiple top CROs on
their phase I My Trial platform. If Medidata cant displace tiny little BioClinicas
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 pharmas 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
Medidatas pricing strategy in EDC has sparked a bit of a shift that is benefiting the
smaller vendors. Combine this trend with the CROs 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 wed 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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