Veeva Systems Is Still a Biotech and Pharmaceuticals Industry Best Buy After Q3 Results

If you're a biotech and pharmaceutical stock dummy like myself, picking individual stocks in the specialized space can be incredibly high risk. As Warren Buffett once said, "Risk comes from not knowing what you're doing."  

Yet there are ways to get in on the industry besides just buying a biotech or healthcare ETF. One way is Veeva Systems (VEEV -0.29%), which just issued another solid report card for its fiscal 2020 third quarter. As the biotech industry continues to grow and digital transformation among businesses spread, this software company is a great bet without needing to know the ins and outs of drug development.

First, a recap on the year so far

Veeva's Q3 revenue topped guidance it provided a few months prior, coming in 25% higher than a year ago at $281 million. Outpacing growth in expenses, adjusted net income for the period surged 35% higher to $95.4 million. Paired with the first two quarters, Veeva is shaping up to have another exceptional year.

Data source: Veeva Systems; pp = percentage point.  

As for Q4 guidance, management called for $296 million to $299 million -- putting Veeva on track for its first year exceeding $1 billion in revenue and good for a full-year growth rate of 26%. Full-year adjusted earnings per share should be at least $2.16, up 33%.

New digital systems take center stage

Veeva Vault again took the lead in driving results, helping new biotech and pharmaceutical customers with their data, clinical trial management, and production pipeline. The software suite is also making its initial push into chemicals, cosmetics, and other consumer goods, and CEO Peter Gassner said that adjacent market opportunity is as large as the biotech and pharma market. Basically, there is plenty of growth left in the tank. 

Image source: Getty Images.

Also notable in the quarter were two purchases of smaller peers. Veeva is usually quiet on the acquisition trail, but the company scooped up two software start-ups during Q3: Crossix and Physicians World, both for undisclosed and likely small sums. Crossix specializes in healthcare patient data privacy and analytics, while Physicians World provides specialized speaker services for medical events. Incidentally, the two takeovers added about $13 million to $15 million in revenue to the full-year outlook and are expected to run an operating loss of $6 million. So nothing earth-shattering, but they do open up new markets for Veeva.  

Veeva continues to build on its lead providing technology for the pharma and biotech industries, and all indications are that there's a long and prosperous road ahead. The only downside is that shares don't come cheap. The stock trades for 57.3 times trailing 12-month free cash flow (money left over after operating and capital expenses are paid) and 70.8 times this year's expected adjusted earnings.

Nevertheless, biotech and pharma companies are busy updating their systems for the digital era, and growth is still going strong for Veeva -- leading to even higher profitability. This stock is worth the premium if investors are willing to buy for the long haul, and any volatility would be par for the course for those used to investing in the leading edge of the healthcare industry.