There's a land grab for market share in the health care IT industry that's trouncing margins and earnings and, in the process, erasing market cap at some of the industry's biggest players.
The latest casualty is Medidata (NASDAQ:MDSO), a health care software and analytic company that's helping drug developers improve how they conduct clinical trials.
Since Medidata's decision to plow money back into product development is eating away at margin and profit, let's take a closer look at the quarter and see if the steep slide lower is justified.
Medidata's shares tumbled more than 20% following its first quarter results. Those results weren't horrible. In fact, revenue was a record.
But record sales weren't good enough given results came in below analyst estimates. Medidata reported adjusted earnings per share of $0.11 on sales of $76 million, which was shy of the street's $0.16 and $79 million guess-timates.
That marked a second consecutive quarter where Medidata's disappointing news caused a steep drop in its shares. In February, the company surprised analysts by issuing full year 2014 earnings guidance of $0.74 to $0.79 per share, below analyst estimates for $0.83.
Short term pain...long term gain?
However, instead of rushing for the exits, investors may want to take the long view when considering Medidata.
Given its shares are down more than 35% in the past month, an opportunity may be presenting itself to pick up shares.
After all, revenue continues to climb sharply. Sales grew 21% year-over-year last quarter to a record $77 million. And billings were also a record, jumping 43% year-over-year to $90 million.
That strength suggests drug developers are clamoring for solutions that may reduce the cost and the time-to-market for their clinical trials.
IMS estimates that 60% of the $110 billion spent annually on drug R&D goes to conducting clinical trials, and since many of those trials require costly changes to design and patient recruitment, IMS thinks the industry could save up to a billion annually just by overcoming those hurdles.
The industry appears to agree. Medidata's customer base grew to 397 in the fourth quarter, up 13% from the year before. And the trend continued in the first quarter as the number of customers grew to 420.
Importantly, customers are ordering more and more of Medidata's services. For example, the number of customers committing to more than one product reached 52% in the first quarter, up from 41% a year ago.
That suggests that Medidata's focus on market share isn't misplaced. Especially given that global R&D spending is rebounding after having stagnated during the recession.
Vying for market share
Medidata isn't the only one offering new data driven solutions to drug developers and their partners. Oracle's (NYSE:ORCL) health services unit and IMS (NYSE:IMS), which recently IPO'd, are also in the hunt.
In 2010, Oracle paid nearly $700 million to acquire the largest electronic data capture company, Phase Forward. Following that deal, Oracle works with all 20 of the 20 largest drug companies and all 10 of the largest 10 contract research organizations, which offer outsourced clinical trial management to drug companies.
While Oracle doesn't break out results for its Health Sciences Network, the company is leveraging its global reach and vast software product line up to develop a comprehensive software-as-a-service offering for drugmakers and hospitals. Across all of Oracle's software products, software sales grew 6% to nearly $7 billion in its fiscal third quarter. Cloud subscriptions jumped 24% year-over-year to $292 million.
At IMS, the company's large proprietary database of prescription and patient data is leveraged for its clinical solutions offering. IMS clinical solutions helps developers and CROs model patient populations to address specific protocols, estimate trial costs and time to completion, and optimize patient recruitment by country.
Across all of IMS' research and data services, total sales grew from $1.8 billion to $1.87 billion in the first nine months of 2013. We'll have to wait until May 1st to learn how the company performed in the first quarter. That's when it will issue results for the first time since its IPO.
But IMS' company-wide operating margin was 14.8% and 9.6% in the first nine months of 2013 and 2012, respectively, and sales of its technology services business, which includes its R&D products, grew from $664 million in the first nine months of 2012 to $732 million in the comparable period of 2013. That helped IMS technology service revenue post compounded annual growth of 13% between 2010 and the third quarter of 2013.
Fool-worthy final thoughts
Oracle and IMS are far more diversified and rely far less on their clinical solutions products than Medidata, I believe that Medidata remains the best pure play in the industry.
Given that trial complexity and scope are accelerating, drug developers' need for these services is likely to grow, not shrink. Between 2008 and 2011, the average number of people participating in clinical trials for recently approved drugs grew from 2,200 to 4,700.
The sheer size, coupled with drugmakers' desire to limit costs in the wake of the patent cliff, suggests to me that a short-sighted view of Medidata's quarterly results may not be the best investment approach.
Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd also owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.