Medidata: Software-as-a-Profit Provider
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Medidata Solutions (NASDAQ: MDSO) is a Software-as-a-Service (SaaS) provider to enable life science companies design and manage clinical trials. The stock IPO'd in 2009 at $14 a share and a brief rally in 2010 was quickly snuffed out before a second rally took hold mid-2011. This rally took out its 52-week high and carried through to today. In the early phase of the rally, there was a high volume day of 2.7 million shares traded in January 2012 (compared to a 157 K average), which predated a guidance raise for FY2012 in March. In fact, the March guidance raise was the start of a series of guidance increases in May and July. On top of this, the stock regularly beats analyst guidance.
It was the buying-bump from the July guidance, combined with a new all-time high, that piqued my interest, but what are the prospects going forward? The driver for the guidance increase was the award of a five year, $100 million contract with "a top 10 pharmaceutical company" for which the company wouldn't release the name but was an existing customer; the contract has a minimum obligation of $57 million over three years. For a company that earned $197 million over the prior 12 months, this single contract is worth around 10% of its revenue in any one year.
The company is relatively coy as to who its customers are, but in 2011 it added 86 new customers. This was a 37% year-on-year increase, bringing the total to 275, and included "22 of the top 25 global pharmaceutical companies" as clients. The company also boasts a 100% success record in renewing enterprise contracts with a revenue retention rate of 95%. So last year was a big year for new customers, and revenue from these deals will filter through 2012 (irrespective of new customer adds in 2012). Competitor BioClinica (NASDAQ: BIOC) earns significantly less revenue at just $70 million, spread over a larger client base of 315. BioClinica is tied to just one major client, Pfizer, which accounted for nearly 20% of its service revenue in 2011; a loss of this client would be a significant blow to the company. Merge Healthcare (NASDAQ: MRGE) is less of a direct competitor with only half of its $248 million revenue coming from Professional Services and SaaS. It wasn't clear how many or who their clients were in this sector.
As for new products, Medidata launched a new Cloud-based service, Medidata Insights, in 2011. Medidata Rave remains its primary revenue driver, although revenue for non-Rave products was up 7% in 2011. The 2012 annual report will give a clearer picture as to the performance of its new offering. Medidata has a wider product set than BioClinica, although the latter company has expanded from its single offering three years ago.
Medidata has a backlog order book of $135 million in 2011, which will contribute to future earnings, so there is something in the tank for the future. BioClinica reported a $123 million backlog in 2011, likely to have a larger impact on the stock going forward if realized. Merge Healthcare only has $45.1 million in backlog orders.
Despite the substantial price rally, Medidata does not have an excessive P/E for a growth stock. The 26.5 is close to the industry standard of 22.3 or the 24.8 of BioClinica (Merge Healthcare has a negative EPS) . The company is well positioned compared to its competitors. The ratio of revenue-per-employee for Medidata is $285.5K compared to $134.9K for BioClinica, $268.1K for Merge Healthcare, or indeed the $322.6K for Oracle.
Few stocks in this sector are performing as well as Medidata, and it certainly has the fundamental groundwork to suggest it can continue.
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