This Drug Discovery Stock Is Leading the Charge In Bringing AI to Healthcare. But Is It a Buy?

Source Motley_fool

Key Points

  • Veeva Systems markets a suite of software services geared toward the biopharmaceutical industry.

  • A wholly owned customer relationship management service is gaining steam for Veeva Systems.

  • With access to mountains of data regarding drug sales and development, new artificial intelligence services could make Veeva Systems' software subscriptions even stickier.

  • 10 stocks we like better than Veeva Systems ›

Veeva Systems (NYSE: VEEV) ticks a lot of the boxes that successful growth-seeking investors tend to look for. It boasts a dominant market position, it realizes recurring revenue from sticky subscription services, and it's exposed to the artificial intelligence (AI) megatrend that's reshaping healthcare.

For over a decade, Veeva Systems has been building the connective tissue that drugmakers will need to integrate AI into their drug discovery pipelines. Unfortunately for new investors, Veeva's prescient positioning isn't a secret. The stock has been trading at a steep valuation.

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Let's take a closer look at the biopharmaceutical industry's favorite software vendor to see if its shares are a smart buy at recent prices.

Individual investor looking at a tablet.

Image source: Getty Images.

Why the pharmaceutical industry is eager to apply AI to the discovery process

Whenever you read about AI and drug discovery, it's important to understand that no amount of processing power will allow scientists to predict what happens when you give an experimental drug to people. The only way to be certain that a new cancer drug can extend survival, for example, is by giving it to patients and following them around for several years.

While AI can't shorten the testing process once a candidate is selected, it could make the new drug candidate selection process more efficient. Drugmakers typically screen thousands of potential molecules before selecting one to test in animal models. The vast majority of candidates that advance to testing in mice never make it to trials with humans.

Once a new drug candidate has been selected for advancement to clinical trials, success is still a long way from guaranteed. From 2006 through 2022, the average pharmaceutical company invested in clinical trials for 116 experimental new drug candidates. Over the same time frame, the average company earned approval from the Food and Drug Administration to market just 15 new drugs.

Reasons to buy Veeva Systems stock now

While AI can't shorten the testing process, it could make the initial discovery process significantly more efficient by connecting heaps of data. Long before ChatGPT reared its ugly head in 2022, Veeva Systems was building an industry cloud for life science businesses that connects regulatory, clinical, and commercial data.

In addition to improving the drug discovery process, Veeva is ready to apply agentic AI applications to the pharmaceutical sales process. The company began in 2007 with a version of Salesforce's customer relationship management (CRM) software customized for pharmaceutical sales. In 2024, Veeva launched a wholly owned CRM service, called Veeva Vault CRM, and it's gaining steam.

In August, Veeva reported that two of the top 20 biopharma businesses on Earth committed to Veeva Vault CRM. That brought the total to seven, and it just added number eight last month. In September, Bristol Myers Squibb committed to the new Veeva Vault CRM service. This December, several new AI agents will become available for the sales staff at Bristol Myers Squibb and the rest of its Veeva Vault CRM customers.

Veeva Systems counts the largest pharmaceutical companies among its Veeva Vault CRM customers, but there's more to its business than CRM software. For example, all of the top 20 biopharma companies use Veeva's electronic trial master file (eTMF) system for storing and accessing essential documents associated with the development process.

Sales growth is strong with fiscal second-quarter revenue that climbed 17% year over year to $789 million. As a subscription-based software business, Veeva is strongly profitable. Adjusted operating income in the second quarter came in at 45% of total revenue.

Reason to be cautious

During Veeva's current fiscal year, which ends in January, management expects adjusted earnings to reach $7.78 per share. That would be an 18% gain over fiscal 2025.

Sadly, I'm not the first analyst to notice Veeva Systems is rapidly growing earnings after nearly monopolizing its software niche. The stock has been trading for 36.5 times forward-looking earnings estimates.

Veeva Systems stock trades at a lofty multiple, but it isn't unreasonable given the company's expected growth rate and its enviable position in a niche software market. Adding some shares to a diversified portfolio now looks like the right move for most growth-oriented investors.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb, Salesforce, and Veeva Systems. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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