Each year, an estimated 100 million, 500 million, and 250 million patients worldwide receive treatment for cancer, cardiovascular diseases, and over 6,600 different types of rare diseases, respectively. So it has become incredibly lucrative for healthcare companies to venture into the field of clinical trial analytics. In this sector, two competitors, Veeva Systems (VEEV 0.32%) and IQVIA (IQV 1.57%), have emerged as leading providers of clinical trial solutions.
The two companies have frequently rustled feathers, including a lawsuit Veeva filed in 2017 (which was expanded this March) accusing IQVIA of violating anti-competition laws with regards to its clinical data software. But which of these companies has the most potential? Let's go ahead and find out.
The financial case
IQVIA is an analytical contract research organization (CRO) providing a range of clinical trial monitoring solutions to healthcare companies. The margins for this business are pretty mediocre -- the company currently boasts 34% gross margins, 7% operating margins, and 2% net margins. Meanwhile, its return on equity amounts to only 3%, while its debt-to-equity ratio stands at nearly 200%.
The company also requires a lot of debt to operate. IQVIA has about $927 million in cash, compared with $12 billion in long-term debt. Its net debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio stands at 4.7, which is high enough for the company's debt to be considered at-risk by rating agencies.
Veeva, meanwhile, is similarly occupied, providing cloud-based pharmaceutical sales and clinical data solutions to healthcare companies. The company is very profitable, with its gross, operating, and net margins amounting to 73%, 26%, and 27%, respectively. Veeva also boasts a return on equity of 21%.
Besides, Veeva has no debt on its balance sheet, and $1 billion in cash and investments. It is worth noting that neither stock is particularly cheap: IQVIA is trading at 24 times adjusted earnings, while Veeva is selling for 84 times adjusted earnings. Better profit margins aside, I believe Veeva's valuation is more justified, for a critical reason.
The COVID-19 case
The COVID-19 pandemic has negatively affected IQVIA's revenue because of its nature as a CRO. Approximately 80% of its clinical research sites are now inaccessible, with 50% of sites using remote monitoring. While the company estimates all of its clinical research sites will reopen by the end of Q4 2020, this is also when public health officials are predicting a second wave of COVID-19, putting the company's guidance into doubt. Indeed, in Q1 2020, the company's revenue grew by just 2.6%, to $2.8 billion.
Meanwhile, Veeva's sales have skyrocketed in the same period. The company partners with CROs to provide cloud software solutions, but it doesn't actually monitor patients, so it's more insulated from the effects of COVID-19. In fact, more and more clinical investigators and pharmaceutical companies have moved to virtual monitoring of clinical data and sales channels due to COVID-19 lockdowns -- the company's Q1 2020 revenue increased by 38% to $337 million. Veeva's revenue retention rate also stood at 121% last year, meaning the business is growing substantially from adding services for its existing customers.
All in all, Veeva is the better buy here thanks to its robust financials and its resilience in the face of the COVID-19 pandemic. The company is guiding for $2.50 in earnings per share and revenue of $1.4 billion for the full year of 2020. It is also well on its way to achieving its $3 billion target revenue by 2025. This is an ideal stock that I believe will deliver riches to healthcare investors.