Value Line recently initiated coverage of Medidata Solutions (MDSO) in its flagship product, The Value Line Investment Survey. The company is a provider of software and cloud-based solutions to pharmaceutical, biotechnology and medical device companies, academic institutions, contract research organizations (CROs), and other medical research organizations. It offers its products using the software-as-a-service (SaaS) model, in which it provides web-based access to its software suite. The company’s overall goal is to simplify and reduce the cost of the research process by offering a system that can handle all aspects of clinical trials from start to finish.
Medidata believes that its products can increase the efficiency and effectiveness of the design, planning, and ongoing managing processes involved in running clinical trials. Some key aspects of this process that its systems are capable of supporting include study and protocol design, trial planning and budgeting, site negotiation, clinical portal, trial management, randomization and trial supply management, clinical data capture and management, safety events capture, medical coding, clinical business analytics, and data flow and interoperability among multiple trial applications. The company’s main and most comprehensive product is Medidata Rave, but it also offers products geared to separate aspects of the research process.
Although Medidata is not the only participant in the medical research field, it has managed to grow its customer base materially in recent years. While there is likely material room to expand over time, it already counts many of the most important industry participants as customers. That said, its scalable services generally generate revenues through multi-study arrangements for a pre-determined number of studies—not on the sale of individual installations. This allows the company to grow with its customers and increases the leverage inherent in its business. However, should research efforts experience an across the board decline, Medidata’s revenues and profits would come under pressure.
At the end of 2011, the company included 22 of the top 25 global pharmaceutical companies, by drug revenue, as customers. Its largest clients in that year were Astellas Pharma, AstraZeneca (AZN), Johnson & Johnson (JNJ – Free Johnson & Johnson Stock Report), Roche, and Takeda Pharmaceutical. That said, no single customer accounted for more than 10% of revenues, suggesting a fairly diverse customer base. In 2011, the top five customers accounted for 31% of revenues, down from 46% in 2009.
Although Medidata itself isn’t subject to material regulation, the companies using its products are. As such, Medidata’s offerings must comply with numerous rules and regulations. Moreover, its global footprint (36% of 2011 revenues were derived from foreign markets) requires it to ensure that its products meet the standards of multiple nations, states, and localities. This is not a small issue, particularly in the medical field. The failure of its products to live up to industry standards could result in a loss of customers and, perhaps more importantly, a public relations issue in which its products are perceived as inferior. This is particularly true because of the sensitive and personal nature of the data being collected. That said, successfully navigating regulatory issues has provided the company with a strong position in its industry.
The company spends a great deal of effort training its customers. Although this can be a material expense, it also fosters increased reliance on its products and strong customer relationships. As such, management believes that its training efforts lead to repeat business—the lifeblood of its business model. This also creates a pool of dedicated customers to which new products and services can be sold as they are created by the company’s research and development efforts. Although internal efforts to create products are material, Medidata Solutions has also acquired companies to gain access to new offerings or to expand its markets and customer base. While expedient, merger and acquisition activity can be costly and complex.
It is worth noting that substantially all of the company’s services are hosted in its Houston, Texas facility. Although Medidata maintains back-up facilities, those systems may be unable to handle a system wide failure. Human error, fire, flood, power loss, and telecommunications failure are among the risks inherent to this situation. A service interruption for any reason could result in both a loss of revenue and a blow to the company’s reputation.
Although only a publically traded company since June 2009, Medidata offers an interesting product suite to an increasingly important industry. Subscribers who believe that the company’s rapid historical growth is likely to continue should consult the regular quarterly reports to keep tabs on the company’s current and prospective business. Note that supplemental reports highlighting important news as it occurs are also important to watch for.
At the time of this articles writing, the author did not have positions in any of the companies mentioned.