Item 1. Business
Company Overview
Medidata is a global life sciences technology provider, dedicated to improving the way clinical research is designed, conducted, analyzed, and commercialized. Our cloud-based platform of solutions, data analytics, and AI enables efficiency and improves quality throughout clinical development programs by accelerating processes, enhancing decision-making, minimizing operational risk, reducing costs, and transforming trial strategies.
Customers can utilize our entire platform or individual solutions, and can subscribe to our technology on a multi-study or single-study basis. Our revenue is comprised of subscription and professional services, which represent approximately 85% and 15% of our business, respectively. Our subscription business model provides us with a recurring revenue stream that we believe delivers greater revenue visibility than perpetual software licensing models.
Our Platform: The Medidata Cloud
The
Medidata Cloud
is the
Intelligent Platform for Life Sciences
, transforming clinical development and converting complex data into cutting-edge insights. It provides a unified platform for demonstrating treatment efficacy and safety, supporting regulatory approval, achieving peak revenue faster, improving outcomes for patients, providers, and payers, and paving the way for the increasingly more precise therapies of the future.
It Starts With Data Capture and Management
Our data capture, management, and reporting family of solutions is the cornerstone of the Medidata Cloud. Our technology captures data and patient feedback throughout the life cycle of a clinical trial.
Rich Data Capture Leads to Pioneering Analytics
Captured data goes on to inform the Medidata Enterprise Data Store ("MEDS") and AI family of solutions. MEDS and AI combine the industry's largest set of de-identified clinical data with the customer's own data to provide immediate metrics and benchmarking; use omics data and machine learning algorithms to detect quality issues and identify correlations in captured data; provide powerful and intuitive cross-study reporting capabilities; and enable customers to leverage historical controls from statistically similar indications and studies through synthetic control arm and synthetic control data solutions.
Pioneering Analytics Accelerates Trial Planning and Management
MEDS and AI power the trial planning and management family of solutions, which provides clinical operations capabilities. At the trial planning stage, study design, site feasibility, and grants budgeting and management tools leverage data from MEDS to optimize trial design, site selection, and budgeting. For ongoing trial management, our technology provides risk assessment and anomaly detection; regulated content creation, storage, and collaboration; and automation of site payments
.
SHYFT Adds Commercial and Real-World Analytics
The SHYFT family of solutions provides actionable insights into sales activities, market composition and dynamics, and real-world patient outcomes to drive peak commercial performance.
Professional Services
Medidata offers tailored professional services to help life sciences companies optimize their processes and realize the full value of our platform.
Our professional services offerings include:
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Implementation services.
We provide implementation of the Medidata Cloud with efficient, scalable configuration and support. Our methodology leverages both the industry-specific expertise of our employees and the specific capabilities of our platform to simplify, streamline, and expedite the implementation of our solutions.
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Sponsor enablement.
Our tailored knowledge transfer enables customers to design, configure, implement, and manage their own studies. We believe that the resulting level of customer autonomy maximizes the benefits of our platform technology.
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Strategic consulting.
Our industry and technology experts draw on Medidata's visibility into best practices and data-driven analytics to advise customers through the transformational internal changes that our platform drives- from re-engineering business processes across departments to changing governance models.
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Partner support.
We offer services supporting successful clinical trials at our channel partners, aimed at maximizing the value of the partner/sponsor/technology collaboration.
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E-learning and training.
We offer self-administered e-learning courses as well as a variety of additional training services through our training group, known as Medidata Academy, to facilitate the successful adoption of our cloud-based solutions throughout the customer or channel partner organization.
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Ongoing support.
We take a consultative approach to ensure quality study design, ease of use, and productivity throughout the project life cycle. We have certified experts available to manage our customers' operational needs and ensure they are gaining maximum value from the Medidata platform within their unique environments.
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Our Strategy
Our goal is to enable our customers to bring their new and enhanced medical treatments to the public quickly and safely and to enable them to successfully market these treatments by providing a platform that uses innovative technology to automate, streamline, support, and enhance clinical development activities. Key elements of our strategy include:
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Expand the number of products used by our existing customers
. We refer to this footprint, measured by the number of Medidata products used by each of our customers, as "density." We seek to improve our density by demonstrating the significant efficiencies that our customer base can achieve by standardizing end-to-end clinical development and commercialization processes on our platform and by leveraging more of our solutions.
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Increase the level of product usage by existing customers.
We refer to the level of usage of Medidata products that are already deployed by customers as "intensity." In cases where customers utilize our solutions for only a subset of their clinical trial activities, we seek to drive usage across more trials, therapeutic areas, geographies, and phases, and to convert single-study customers to multi-study customers.
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Continuously improve our platform.
We continue to enhance our platform with regular releases, adding new functionality, integrations, and user benefits.
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Develop additional innovative technologies and services.
We continue to build new innovative solutions that further transform the clinical development and commercialization process, and offer them to new and existing customers. We continue to develop our analytics and benchmarking capabilities, creating value for our customers by improving decision-making.
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Grow indirect sales partnership initiatives
. We pursue strategic partnerships with channel partners, such as contract research organizations ("CROs") and systems integrators, to position the Medidata Cloud as the platform of choice for their outsourced clinical trial management services. Our well-established program of support, training, and certification enables partners to cost-effectively implement our solutions and services in sponsor studies as they provide their other services related to pharmaceutical development.
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Position the Medidata Cloud as a key player in the evolving clinical ecosystem.
We seek opportunities for collaborative innovation, building strategic relationships with other leading technology and data firms. Partnerships enable us to enhance and complement our portfolio of offerings and achieve greater scale in the marketplace while helping to drive the evolution of life sciences.
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Expand our global customer base.
We have offices in 7 countries and serve customers in over 30 countries. We will continue to expand our sales, marketing, technology, and support resources into new markets around the world where clinical development activity is accelerating.
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Research and Development
We believe that our future success depends on our ability to continue to enhance and broaden the Medidata Cloud to meet the evolving needs of our current and future customers. Equally important is our ability to innovate, taking advantage of latest technologies and trends in life sciences. Our efforts are focused both on developing new, complementary technologies and on enhancing the existing solutions in our platform. Our research and development organization includes product managers that work with both internal and customer experts to plan new features and functionality; software project managers that oversee development teams and timeline; product engineers, data scientists, and user experience designers that build the technical components of our platform; and software quality assurance and technical documentation specialists that deliver a validated final product to our customers.
Sales and Marketing
Our sales and marketing efforts focus on enhancing the global recognition and reputation of our brand, increasing consideration of and preference for our platform and professional services, and generating qualified sales leads. We market and sell our cloud-based solutions through a direct sales force and through relationships with channel and strategic partners, focusing efforts on key executives and decision makers within our existing and prospective customer base.
Our direct sales force operates globally and is organized by both region and focus area. Sales through this direct channel currently represent the largest source of our total revenues.
Many sponsors of clinical trials outsource some or all of their clinical research activities as a means of expanding capacity, controlling costs, and focusing on core strengths. Our relationships with channel partners, such as CROs and systems integrators, help position the Medidata Cloud as the platform of choice for these sponsors' outsourced services. We train, certify, and support our partners on our solutions, enabling them to quickly and cost-effectively implement our technology in sponsors' studies.
Customers
We serve pharmaceutical, biotechnology, medical device and diagnostics companies, institutions (which include academic research centers, government, and other non-profit organizations), CROs, and other entities engaged in conducting and/or sponsoring clinical trials and commercializing treatments. These customers range in size from the smallest of start-ups to the largest of global pharmaceutical companies. As of
December 31, 2018
, we had over one thousand customers.
We sell our solutions and provide services globally. Approximately
25%
,
23%
, and
23%
of our revenues in each of the years ended
December 31, 2018
,
2017
, and
2016
, respectively, were derived from international operations. A summary of our domestic and international disaggregated revenues is set forth in
Note 3
, "Revenues," to our consolidated financial statements, which are included in Item 8 of this Annual Report on Form 10-K.
Our five largest customers accounted for
22%
,
26%
, and
26%
of our revenues in
2018
,
2017
, and
2016
, respectively. In
2018
,
2017
, and
2016
, no single customer accounted for 10% or more of our total revenues. At
December 31, 2018
and
2017
, no one customer comprised 10% or more of our total accounts receivable.
Backlog
At
December 31, 2018
and
2017
, our total multi-year subscription backlog was
$1,170 million
and
$1,036 million
, respectively.
Total subscription backlog increases with the addition of new customer contracts, customer renewals, and contract modifications. It decreases with the recognition of revenue or contract modifications. The timing and duration of new contracts, renewals, contract modifications, and revenue recognition are variable and are not comparable year to year. Total subscription backlog is typically highest at the beginning of a contract and approaches zero prior to renewal. The level of total backlog is not an indicator of the likelihood of renewal or future revenue of that contract. The amount of total backlog associated with an existing multi-year contract may significantly vary year to year solely based on the status of renewal and have no significant impact on the amount of revenue attributable to that contract in a year-over-year comparison. Additionally, large multi-study deals may include provisions under which the customer contracts for a smaller amount of subscription services as they start the contract and the amount ramps up over the life of the contract; the result is an initial large increase in total subscription backlog that does not equate to a proportional increase in revenue in the subsequent period.
We also calculate a 12-month subscription backlog, which represents the future contract value of outstanding multi-study and single study arrangements, billed and unbilled, to be recognized in the next 12 months, excluding expected intra-year renewals and other adjustments. As of January 1,
2019
and
2018
, we had 12-month subscription backlog of approximately
$522 million
and
$446 million
, respectively. We believe that 12-month subscription backlog is more easily reconciled to future revenues to be recognized than total backlog, and therefore is a more valuable metric for evaluation of expected future revenues.
Our presentation of backlog may differ from that of other companies in our industry.
Technology and Support Infrastructure
We have designed our platform to maximize ease of use, flexibility, data visibility, and scalability. Our solutions are deployed through the use of industry-standard web browsers and mobile devices, service-oriented architectures, three-tiered server architectures, or a web server, a proprietary application server, and a database server. End users can access our solutions through any web browser from anywhere in the world without downloading or installing any Medidata-specific software. We develop our solutions on a broad base of technologies, including Java, Scala, .NET, Ruby, Python, R, SQL Server, Business Objects, AWS, Chef, VMWare, and others. We utilize technologies such as firewalls, intrusion detection, and encryption, along with security monitoring, to ensure the privacy and security of our customers' data.
We manage a hybrid cloud, operating our solutions on a combination of private data center and public cloud. Monitoring services are provided on a 24/7 basis by trained Medidata staff to ensure consistent delivery and availability. Advanced backup and storage frameworks, regionally-diverse data centers, and trained engineering teams are in place to provide for quick reaction time in the event of a disaster.
We offer 24/7 support to our end users through a global array of multi-lingual help desks.
Competition
The market for clinical trial solutions is highly competitive and rapidly evolving. It is subject to continually changing technology, shifting customer needs, changes in laws and regulations, and frequent introductions of new products and services. The competitive landscape is intensified by new entrants and start-ups that bring a broad range of new solutions and offerings to the health care technology market.
In general, our competitors include a variety of entities such as information, analytics, technology and services companies, as well as in-house technologies developed by our clients. Our platform competes with firms such as BioClinica, Inc., IQVIA (formerly Quintiles IMS), Oracle, IBM (Clinical Development; Watson Group and/or Watson Health), Parexel Informatics, Veeva Systems, Inc. and other large-scale technology providers that offer a range of products and services that compete with Medidata's solutions. In the future, we may also compete with horizontal cloud-based providers that build platforms that support life sciences customers. On a product-by-product basis, we also compete with a number of vendors offering applications and systems competitive with Medidata in
specific areas, such as eResearch Technology, Inc., CRF Health, Bracket, DataTrak International, Inc., Medrio, Inc., Merge Healthcare (an IBM Company), and OmniComm Systems, Inc.
We compete on the basis of several factors, including the following:
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innovation, breadth and depth of solution offerings;
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data privacy and security infrastructure;
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strategic partnerships with other companies in the life sciences and technology industries;
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platform capabilities and solution functionality and features, including analytics;
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scalability and upgrade pathways and support;
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speed, performance, and ease of use of our solutions;
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product reliability and infrastructure accessibility and security;
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breadth and strength of partnerships;
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depth of expertise and quality of our global professional services and customer support; and
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sales and marketing capabilities, including the ability to create and communicate operational value.
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Although some of our competitors and potential competitors may have greater name recognition, longer operating histories, more product offerings, and greater financial, technological, and other resources than we do, we believe that we compete favorably with our competitors on the basis of these factors and that the significant regulatory and industry expertise required for the development of life sciences solutions may hinder newer or less established participants in the market.
Intellectual Property
Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing the proprietary rights of others. We rely upon a combination of trademark, trade secret, copyright, patent and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we protect our intellectual property and proprietary information by requiring our employees and consultants to enter into confidentiality, non-competition, and assignment of inventions agreements. We have registered trademarks and service marks in the United States ("U.S.") and abroad, and filed applications for the registration of additional trademarks and service marks. Our principal trademarks are “Medidata,” "Medidata Solutions," "Medidata Clinical Cloud," "Medidata Patient Cloud," "Rave," and "Architecture of Hope." We also hold several domain names, including the domain names "medidata.com," “mdsol.com,” and “medidatasolutions.com.” As of
December 31, 2018
, we hold 33 patents as well as numerous published patent applications outstanding in the U.S. and certain foreign countries.
The legal protections described above afford only limited protection for our technology. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product and service developments, and enhancements to existing products and services are more important than the various legal protections of our technology to establishing and maintaining a technology leadership position.
Government and Other Regulations
Regulation of Clinical Trials and Electronic Systems Used in Clinical Trials
The conduct of clinical trials is subject to regulation and regulatory guidance associated with the approval of new drugs, biological products and medical devices imposed upon the clinical trial process by the U.S. Food and Drug Administration ("FDA"), the Pharmaceuticals and Medical Devices Agency ("PDMA") in Japan, the Medicines and Healthcare Products Regulatory Agency ("MHRA") in the United Kingdom, the European Medicines Agency ("EMA") in EU/EEA, and other foreign governmental regulatory agencies and international non-governmental organizations, such as the International Conference on Harmonisation ("ICH").
The laws, regulations, and guidance from various countries and regions are often, but not always, harmonized. In those areas that are not yet harmonized, conflicting or even contradictory requirements may exist. Further, the regulatory environment and requirements for clinical trials and drug/biologic/device approvals are undergoing rapid change in the U.S., the European Union ("EU") (including the anticipated implementation of the new Regulation EU No. 536/2014 of the European Parliament and of the Council on clinical trials on medicinal products for human use, and repealing Directive 2001/20/EC) and other areas. We continue to monitor regulatory developments and industry best practices in these areas and make changes and introduce improvements as necessary to remain in compliance. In addition, the uncertainties around the United Kingdom's anticipated 2019 exit from the EU, as well as the move to the EMA from London to Amsterdam, may impact regulatory operations (including the development of new guidance) and the life sciences industry.
The use of our software products, services, and hosted solutions by customers engaged in clinical trials must be done in a manner that is compliant with a complex array of laws and regulations. Our applications have been designed to allow our customers to deploy such clinical trials as part of a validated, fit-for-purpose system, compliant with applicable laws and regulations.
The use of software during the clinical trial process must adhere to the regulations and regulatory guidance known as Good Clinical Practice ("GCP"), guidance documents, and other various codified practices such as the Consolidated Guidance for Industry from the ICH Regarding Good Clinical Practices for Europe, the Asia Pacific region, and the Americas. The current amendment (ICH E6(R2)) encourages sponsors to implement improved oversight and management of clinical trials, while continuing to ensure protection of human subjects participating in trials and clinical trial data integrity.
In addition to these regulations and guidance documents, regulatory authorities have developed regulations and regulatory guidance concerning electronic records and electronic signatures. In general, regulatory guidance stipulates that computerized systems used to capture or manage clinical trial data must meet certain standards for attributability, legibility, contemporaneousness, originality, accuracy, completeness, consistency, and availability, as well as integrity and security. If our customers violate GCP or other regulatory requirements, both parties may run the risk that the violation will result in a regulatory citation, the suspension of the clinical trial, investigator disqualification or debarment, the rejection or withdrawal of a product marketing application, criminal prosecution, or civil penalties. Such risks not only impact our customers, but could also have a material adverse effect on our business, results of operations, or financial condition.
Regulation of Health Information
Government regulation of the use and disclosure of subject (patient) privacy and data protection imposes a number of requirements. In the U.S., regulations issued pursuant to the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") require certain “covered entities,” including facilities and providers that are involved in clinical trials, to comply with established standards regarding the privacy and security of protected health information, and to use standardized code sets when conducting certain electronic transactions. The regulations also require “business associates” that provide services on behalf of the covered entity to follow the same standards. Although we are not a “covered entity” or a “business associate,” and therefore technically are not subject to HIPAA regulations, many users of our products and services are directly regulated under HIPAA and our products cannot be utilized in a manner that is inconsistent with the users' HIPAA compliance requirements. In addition, to the extent we perform functions or activities on behalf of customers that are directly regulated by such health-related privacy laws, we may be required to comply with a number of the same HIPAA requirements. The breach of such requirements on our part may result in liability to our customers and us. In addition to HIPAA, most states within the U.S. have enacted or are considering their own privacy and data protection laws. Such state laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements and we must comply with them as well.
In addition to complying with the privacy laws in the U.S., many foreign governments have data privacy and data protection laws that include additional protections for customer end-user information and for sensitive patient information, including clinical data. Because our services are available to customers in many foreign countries and to domestic customers using our services for multinational clinical trials, we must provide our services in a manner that supports our customers' compliance obligations. Foreign government data protection laws and regulations include the General Data Protection Regulation ("Regulation (EU) 2016/679" or the "GDPR"), and European country-specific laws and regulations that implement or will implement the GDPR, as well as the EU-U.S. Privacy Shield framework.
Employees
As of
December 31, 2018
, we had a total of
1,998
employees, of which
1,560
were located in the U.S.,
252
in Europe, and
186
in the Asia Pacific region. As of
December 31, 2018
, we had
238
employees in customer services, support, and delivery,
348
employees in professional services,
744
employees in research and development,
420
employees in sales and marketing, and
248
employees in administrative and corporate functions. We also retain additional outside contractors to supplement our services and research and development staff on an as-needed basis. As of
December 31, 2018
, we had
599
independent contractors, the majority of which have been engaged in connection with help desk, customer service, and software development functions. None of our employees are covered by a collective bargaining agreement, and we consider our relationships with our employees to be good.
Available Information
We were organized as a New York corporation in June 1999 and reincorporated in the State of Delaware in May 2000. Our principal executive offices are located at 350 Hudson Street, 9th Floor, New York, New York 10014, and our telephone number is (212) 918-1800. Our website is located at
www.medidata.com
. No information contained on our web site is intended to be included as part of, or incorporated by reference into, this Annual Report on Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as well as reports relating to our securities filed by others pursuant to Section 16 of such act, are available through the investor relations page of our web site free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). The SEC maintains a web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is
www.sec.gov
.
Item 1A. Risk Factors
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The risks described below are those which we believe are the material risks we face. Any of the risk factors described below or additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Business
Our quarterly and annual operating results fluctuate and may continue to fluctuate in the future, and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.
Our quarterly and annual revenues and operating results have varied in the past and may vary significantly in the future depending on factors such as:
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budgeting cycles of our customers;
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the length of our sales cycle;
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our ability to develop innovative products;
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the timing of new product releases by us or our competitors;
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market acceptance of our products;
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changes in our and our competitors' pricing policies;
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the financial condition of our current and potential customers;
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changes in the regulatory environment;
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changes in operating expenses and personnel changes;
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our ability to hire and retain qualified personnel;
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the effect of potential acquisitions and consequent integration;
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our ability to realize benefits from strategic partnerships, acquisitions or investments;
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equity issuances, including as consideration in acquisitions;
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variations in the revenue mix of our services and growth rates of our cloud subscription and professional services support offerings;
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changes in our business strategy;
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increases in our costs due to inflation; and
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general economic factors, including factors relating to disruptions in the world credit and equity markets and the related impact on our customers' access to capital.
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Our future growth is dependent on the successful development and introduction of new products and enhancements to existing products. There can be no assurance that we will be successful in developing and marketing, on a timely basis, new products or product enhancements, that our new products will adequately address the changing needs of the marketplace, or that we will successfully manage the transition from existing technologies. Certain of these products require a higher level of sales and support expertise. The ability of our sales channel to obtain this expertise and to sell the new product offerings effectively could have an adverse impact on our sales and financial results in future periods. Any of these scenarios may result in the loss of or delay in customer acceptance, diversion of development resources, damage to our reputation, or increased service and warranty costs, any of which could have a material adverse effect on our business, financial position, results of operations, and cash flows.
In addition, a significant portion of our operating expenses is relatively fixed and planned expenditures are based in part on expectations regarding future revenues. Accordingly, unexpected revenue shortfalls may decrease our gross margins and could cause significant changes in our operating results from year to year. As a result, in future quarters our operating results could fall below the expectations of securities analysts or investors, in which event our stock price would likely decrease.
We derive a significant percentage of our revenues from a concentrated group of customers and the loss of one or more major customers could materially and adversely affect our business, results of operations or financial condition.
Our top five customers accounted for approximately
22%
,
26%
, and
26%
of our revenues in
2018
,
2017
, and
2016
, respectively. In
2018
,
2017
, and
2016
, no single customer accounted for 10% or more of our total revenues. The loss of any of our major customers could have a material adverse effect on our results of operations and financial condition. We may not be able to maintain our customer relationships, and our customers may delay payment under, or fail to renew, their agreements with us, which could adversely affect our business, results of operations, or financial condition. Any reduction in the amount of revenues that we derive from these customers, without an offsetting increase in new sales to other customers, could have a material adverse effect on our operating results. A significant change in the liquidity or financial position of our customers could also have a material adverse effect on the collectability of our accounts receivable, our liquidity, and our future operating results.
If our customers cancel their contracts or terminate or delay their clinical trials, we may lose or delay revenues and our business may be harmed.
Certain of our customer contracts are subject to cancellation by our customers at any time with limited notice. Customers engaged in clinical trials may terminate or delay a clinical trial for various reasons, including the failure of the tested product to satisfy
safety or efficacy requirements, unexpected or undesired clinical results, decisions to deemphasize a particular product or forgo a particular clinical trial, decisions to downsize clinical development programs, insufficient patient enrollment or investigator recruitment, and production problems resulting in shortages of required clinical supplies. In the case of our cloud-based solutions and services, any termination or delay in the clinical trials would likely result in a consequential delay or termination in those customers' service contracts. We have experienced terminations and delays of our customer service contracts in the past (although no such past terminations have had a significant impact on our results of operations) and we expect to experience additional terminations and delays in the future. The termination of single-study arrangements could result in decreased revenues and the delay of our customers' clinical trials could result in delayed professional services revenues, which could materially harm our business.
As our focus turns to selling additional cloud-based solutions and services to enterprise customers, our sales cycle may become more time-consuming and expensive and less predictable, and implementation challenges may arise, any of which could harm our business and operating results.
Our future success depends in part on our ability to sell additional cloud-based solutions and services to our current customers. This may also require increasingly sophisticated and costly sales efforts that are targeted at senior management. Similarly, the rate at which our customers purchase new or enhanced services depends on a number of factors. If our efforts to sell new solutions and expanded services to our existing customers are not successful, our growth prospects may suffer.
As we target more of our platform sales efforts at larger enterprise customers, we may face greater costs, longer sales cycles, and less predictability in our sales pipeline. The customer's decision to use our solutions and services may be an enterprise-wide decision and, if so, these types of sales would require us to provide prospective customers with greater levels of education regarding the use and benefits of our cloud-based solutions and services, as well as education regarding privacy and data protection laws. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual customers, driving up costs and time required to complete sales and diverting our sales and professional services resources to a small number of large transactions.
Because we recognize revenue from subscriptions for our services over the term of the subscription, downturns or upturns in new business may not be immediately reflected in our operating results.
We generally recognize revenue from customers ratably over the terms of their subscription agreements, which typically range from one to five years. As a result, most of the revenue we report in each quarter is the result of subscription agreements entered into during previous quarters. Therefore, a decline in new or renewed subscriptions in any one quarter may not be reflected in our revenue results for that quarter. Any such decline, however, will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our services, and potential changes in our attrition rate, may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.
If our security is breached, our business could be disrupted, our operating results could be harmed, and customers could be deterred from using our products and services.
Our business relies on the secure electronic transmission, storage, and hosting of sensitive information, including clinical data, financial information, and other sensitive information relating to our customers, company, and workforce. We anticipate collecting more such information directly from patients as part of our Patient Cloud and mHealth initiatives, including via mobile devices and related systems provided by third parties. As a result, we face some risk of a deliberate or unintentional incident involving unauthorized access to our computer systems (including, among other methods, cyber attacks, or social engineering) that could result in misappropriation or loss of assets or sensitive information, data corruption, or other disruption of business operations. In light of this risk, we have devoted significant resources to protecting and maintaining the confidentiality of our information, including implementing security and privacy programs and controls, training our workforce, and implementing new technology. We have no guarantee that these programs and controls will be adequate to prevent all possible security threats. We believe that any compromise of our electronic systems, including the unauthorized access, use, or disclosure of sensitive information or a significant disruption of our computing assets and networks, would adversely affect our reputation and our ability to fulfill contractual obligations, would require us to devote significant financial and other resources to mitigate such problems, and could increase our future cyber security costs. Moreover, unauthorized access, use, or disclosure of such sensitive information could result in contractual or other liability. In addition, any real or perceived compromise of our security or disclosure of sensitive information may result in lost revenues by deterring customers from using or purchasing our products and services in the future or prompting them to use competing service providers.
Any failure by us to properly protect customer data, including any personal health information we possess or are deemed to possess in connection with the conduct of clinical trials, could subject us to significant liability.
Our customers use our solutions to collect, manage, and report information in connection with the conduct of clinical trials. This information may be considered our customers' proprietary information and/or personal health information of the clinical trial participants or patients. In addition, our Patient Cloud and mHealth initiatives are anticipated to result in our collecting more data (which may or may not be personal health information) directly from patients, including via mobile devices and related systems provided by third parties. Regulation related to the use and disclosure of personal health information continues to expand in scope and complexity. Increased focus on individuals' rights related to their personal information, including personal health information, could lead to an increase in existing and future legislative or regulatory initiatives giving direct legal remedies to individuals, including rights to damages, against
entities deemed responsible for not adequately securing such personal information. In addition, courts may look to regulatory standards in identifying or applying a common law theory of liability. Since we receive and process our customers' proprietary information and/or personal information of clinical trial participants from customers utilizing our hosted solutions, there is a risk that we could be liable if there were a breach of an obligation to a protected person under contract, standard of practice, or regulatory requirement. If we fail to properly protect our customers' data or personal information that is in our possession or deemed to be in our possession, we could be subjected to significant liability and our reputation could be harmed.
We rely upon two internal hosting facilities and third party cloud computing services to deliver our solutions to our customers and any disruption of or interference with our hosting systems, operations, or third party cloud computing services would harm our business and results of operations.
Substantially all of the computer hardware necessary to deliver our solutions is located at our internal hosting facilities in Houston, Texas and Frankfurt, Germany. In addition to our dedicated hosting facilities, we utilize third-party cloud computing services from vendors such as Amazon Web Services ("AWS") to help us efficiently scale our cloud-based solutions. Because we cannot easily switch our AWS-serviced operations to another cloud provider, any disruption of or interference with our use of AWS would impact our operations, and our business would be adversely impacted. Our systems and operations or those of AWS could suffer damage or interruption from human error, fire, flood, power loss, telecommunications failure, break-ins, terrorist attacks, acts of war, and similar events. The occurrence of a natural disaster, an act of terrorism, or other unanticipated problems at our or AWS's hosting facilities could result in lengthy interruptions in our service. Although we and AWS maintain backup facilities and disaster recovery services in the event of a system failure, these may be insufficient or fail. Any system failure, including network, software, or hardware failure, that causes an interruption in our Houston or Frankfurt data centers or our use of AWS or that causes a decrease in responsiveness of our cloud-based solutions could damage our reputation and cause us to lose customers, which would harm our business and results of operations. Additionally, our business may be harmed if our customers and potential customers believe our service is unreliable.
Data protection laws and regulations may limit the use of our platform and give rise to operational interruption, liabilities, and reputational harm, which could have a materially adverse impact on our business.
Our customers can use our platform to collect, process, and transfer personal information globally, including sensitive personal information such as clinical information. As regulatory focus on privacy issues continues to increase and worldwide laws and regulations concerning the handling of personal information expand and become more complex, potential risks related to data collection and use for our customers and for our business will intensify. For example, the EU and the U.S. formally entered into a new framework in July 2016 that provides a mechanism for companies to transfer data from EU member states to the U.S. This new framework, called the Privacy Shield, is intended to address shortcoming identified by the Court of Justice of the EU in the previous EU-U.S. Safe Harbor Framework, which the Court of Justice invalidated in October 2015. The Privacy Shield and other data transfer mechanisms are likely to be reviewed by the European course, which may lead to uncertainty about the legal basis for data transfers to the U.S. or interruption of such transfers. In the event such court decisions block the transfers to or from a particular jurisdiction and in the event that no other transfer mechanisms, such as the model clauses, are legally adequate, this could give rise to operational interruption in the performance of our services for customers and internal processing of employee information, regulatory liabilities, and/or reputational harm. In addition, U.S. and foreign governments have enacted or are considering enacting legislation or regulations, or may in the future interpret existing legislation or regulations, in a manner that could significantly impact our ability and the ability of our customers and data partners to collect, augment, use, transfer, and share personal and other information that is integral to certain services we provide. These developments in Europe and elsewhere could harm our business, financial condition, and results of operations, including reducing demand for our platform or limiting its use, increasing our operating costs, and slowing or preventing the closing of sales transactions.
In addition, we may be subject to additional data privacy and security laws in the U.S., such as the California Consumer Privacy Act of 2018. The changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, including health care data or other personal information, could greatly increase our cost of providing our products and services or even prevent us from offering certain services.
Regulators globally are also imposing greater compliance obligations and monetary fines for privacy violations. For example, in 2016 the EU adopted the GDPR, a law governing data practices and privacy, which became effective in May 2018. The law created a range of new compliance obligations, significantly increased financial penalties for non-compliance, and extended the scope of the EU data protection law to all companies processing data of EU residents, regardless of the company's location. If we are not compliant with GDPR requirements, we may be subject to significant fines and our business may be harmed. The GDPR and other privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements with respect to our customers' use of our platform. We have incurred - and may continue to incur - significant expense to comply with mandatory privacy and security standards and protocols imposed by law, regulation, industry standards, or contractual obligations. In addition, the future enactment of more restrictive laws, rules or regulations, such as those requiring data localization, and/or future enforcement actions or investigations could have a materially adverse impact on us through increased costs or restrictions on our business and noncompliance could result in regulatory penalties, significant legal liability, and harm to our reputation.
Defects or errors in our cloud-based solutions that significantly impact our customers could harm our reputation, result in significant cost to us, and impair our ability to market our solutions.
The software applications underlying our cloud-based solutions and services, including Medidata Rave, are inherently complex and may contain defects or errors, some of which may be material. Errors may result from our own technology or from the interface of our cloud-based solutions with legacy systems and data that we did not develop. The risk of errors is particularly significant when a new product is first introduced or when new versions or enhancements of existing products are released. The likelihood of errors is increased as a result of our commitment to the frequent release of new products and enhancements of existing products.
We have, from time to time, found defects in our solutions. Although these past defects have not resulted in any litigation against us to date, we have invested significant capital, technical, managerial, and other resources to investigate and correct these past defects, and we have needed to divert these resources from other development efforts. In addition, material performance problems or defects in our solutions may arise in the future. Material defects in our cloud-based solutions could result in a reduction in sales, delay in market acceptance of our solutions, or credits or refunds to our customers. In addition, such defects may lead to the loss of existing customers and difficulty in attracting new customers, diversion of development resources, or harm to our reputation.
Correction of defects or errors could prove to be impossible or impractical. The costs incurred in correcting any defects or errors or in responding to resulting claims or liability may be substantial and could adversely affect our operating results.
If we are not able to reliably meet our data storage and management requirements, or if we experience any failure or interruption in the delivery of our services over the Internet, customer satisfaction and our reputation could be harmed and customer contracts may be terminated.
As part of our current business model, we store and manage hundreds of terabytes of data for our customers, resulting in substantial information technology infrastructure and ongoing technological challenges, which we expect to continue to increase over time. If we do not reliably meet these data storage and management requirements, or if we experience any failure or interruption in the delivery of our services over the Internet, customer satisfaction and our reputation could be harmed, leading to reduced revenues and increased expenses. The services we provide to customers are subject to service level agreements and, in the event that we fail to meet guaranteed service or performance levels, we could be subject to issuance of customer credits or termination of these customer contracts. If the cost of meeting these data storage and management requirements increases, our results of operations could be harmed.
We are subject to risks associated with our strategic investments. Other-than-temporary impairments in the value of our investments could negatively impact our financial results.
We invest in early-to-late stage companies for strategic reasons to support key business initiatives, and may not realize a return on our strategic investments or realize benefits from such strategic business relationships. If any of the third parties with which we enter a strategic relationship fails to perform as expected, breaches or terminates their agreement with us, or becomes engaged in a dispute with us, our reputation could be adversely affected and our business could be harmed. These companies also generate net losses and the market for their products, services or technologies may be slow to develop; they are therefore dependent on the availability of later rounds of financing from banks or investors on favorable terms to continue their operations. The financial success of our investment in any company is typically dependent on a liquidity event, just as a public offering, acquisition, or other favorable market event reflecting appreciation to the cost of our initial investment. The capital markets for public offerings and acquisitions are dynamic and the likelihood of liquidity events for the companies we have invested in could significantly worsen. Further, valuations of privately held companies are inherently complex due to the lack of readily available market data. If we determine that any of our investments in such companies have experienced a decline in value, we may be required to record an impairment, which could negatively impact our financial results. All of our investments are subject to a risk of partial or total loss of investment capital.
We may expand our business through new acquisitions in the future. Any such acquisitions could disrupt our business, harm our financial condition and dilute current stockholders' ownership interests in our company.
We intend to pursue potential acquisitions of and investments in businesses, technologies, or products complementary to our business and periodically engage in discussions regarding such possible acquisitions. For example, we acquired Fast Track Systems, Inc. ("Fast Track") in March 2008; Clinical Force Limited ("Clinical Force") in July 2011; Patient Profiles, LLC ("Patient Profiles") in October 2014; Intelemage, LLC ("Intelemage") in April 2016; CHITA Inc. ("CHITA") in February 2017; Mytrus, Incorporated ("Mytrus") in April 2017; and SHYFT Analytics, Inc. ("SHYFT") in June 2018.
We may encounter difficulties in identifying and acquiring complementary products, technologies, or businesses, and in the case of executed acquisitions, may encounter numerous risks, including some or all of the following:
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substantial cash expenditures;
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incurrence of costs, debt, and contingent liabilities, some of which we may not identify at the time of acquisition or which may ultimately be greater than we anticipate;
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difficulties in integrating and assimilating the operations, products, and personnel of the acquired companies;
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diversion of management's attention away from other business concerns;
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risk associated with entering markets in which we have limited or no direct experience;
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potential loss of key employees, customers, and strategic alliances from either our current business or the target company's business;
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delays in customer purchases due to uncertainty and the inability to maintain relationships with customers of the acquired businesses; and
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failure to achieve anticipated business development benefits due to an inadequate evaluation of acquisitions or investments.
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An acquisition may not result in short-term or long-term benefits to us. The failure to execute acquisitions or investments successfully or otherwise adequately address these risks could materially harm our business and financial results. We may incorrectly judge the value or worth of an acquired company or business. In addition, our future success will depend in part on our ability to manage the growth anticipated with these acquisitions.
Furthermore, the development or expansion of our business or any acquired business or companies may require a substantial capital investment by us. We may not have these necessary funds or they might not be available to us on acceptable terms or at all. We may also seek to raise funds for an acquisition by issuing equity securities or convertible debt, as a result of which our existing stockholders may be diluted or the market price of our stock may be adversely affected.
Supporting our existing and growing customer base could strain our personnel resources and infrastructure, and if we are unable to scale our operations and increase productivity, we may not be able to successfully implement our business plan.
We continue to experience significant growth in our business, operations, and personnel, which has placed a strain on our management, administrative, operational, and financial infrastructure. Our success will depend in part upon the ability of our senior management to manage our projected growth effectively. To do so, we must continue to increase the productivity of our existing employees and to hire, train, and manage new employees as needed. To manage the expected domestic and international growth of our operations and personnel, we will need to continue to improve our operational financial and management controls, our reporting systems and procedures, and our utilization of real estate. If we fail to successfully scale our operations and increase productivity, we will be unable to execute our business plan.
We regularly update or replace our various software systems. If the implementations of these new applications are delayed, or if we encounter unforeseen problems with our new systems or in migrating away from our existing applications and systems, our operations and our ability to manage our business could be negatively impacted.
Our revenues derived from international operations are subject to risks that could have an adverse effect on our results of operations.
We intend to continue our strategic expansion into new geographic areas and expect that international customers will continue to account for a substantial percentage of our revenues. International operations are subject to inherent risks. These risks include:
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the economic conditions in these various foreign countries and their trading partners, including conditions resulting from disruptions in the world credit and equity markets;
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greater difficulty in accounts receivable collection and enforcement of agreements;
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requirements to comply with foreign laws;
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data privacy laws and regulations which restrict the collection by our customers, processing or transfer into the U.S. of customer personal information or that require customer information to be collected or processed in a designated territory;
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changes in regulatory requirements;
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risk of non-compliance with the U.S. Foreign Corrupt Practices Act ("FCPA") or similar regulations in other jurisdictions;
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fewer legal protections for intellectual property and contract rights;
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tariffs or other trade barriers;
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difficulties in managing foreign operations;
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unavailability of staff with needed skills;
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exposure to interest rate fluctuations;
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potentially adverse tax consequences; and
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exposure to foreign currency exchange risk associated with transactions entered into in currencies other than the U.S. dollar.
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Our failure to successfully mitigate these risks could have a material adverse effect on our business, results of operations, and financial condition. In addition, we are continuing to execute on our growth initiatives in Asia, where our strategy is to broaden adoption of our application services, especially in China and South Korea. We are subject to risks inherent in foreign trade, including increased credit risks, tariffs and duties, fluctuations in foreign currency exchange rates, and international political, regulatory and economic developments, all of which can have a significant influence on our operating results. Some of our international sales are made in local currencies, which could fluctuate against the dollar. Accordingly, our operating results could be adversely affected by unfavorable foreign currency fluctuations.
Changes in the United Kingdom's economic and other relationships with the European Union could negatively impact us.
In June 2016, in a referendum vote commonly referred to as "Brexit," a majority of British voters voted to exit the EU. In March 2017, the United Kingdom ("U.K.") government officially triggered the process to formally initiate negotiations for the terms of separation from the EU. EU rules provide for a two-year negotiation period, ending on March 29, 2019, unless an extension is agreed to by the parties. The withdrawal negotiations began in 2017 and remain ongoing. The U.K.'s stated intention is to leave the EU's Single Market and Customs Union. The draft deal negotiated by the U.K. and EU was overwhelmingly rejected by the U.K. Parliament in a vote on January 15, 2019. Consequently, shortly before the U.K. is due to leave the EU, there is no agreement on what the terms of the U.K.'s future relationship with the EU will be. The options are: a new deal being struck; and/or the deadline of March 29, 2019 being extended; and/or the U.K. having a further referendum and voting to remain in the EU; or the U.K. leaving the EU without a deal. It is impossible at the moment to predict which outcome is most likely. The effects of Brexit will depend on any agreements the U.K. makes to retain access to the EU markets either during a transitional period or more permanently. Without access to the single EU market, it may be more challenging and costly to provide our services in Europe. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which EU laws to replace and replicate. If there are changes to U.K. immigration policy as a result of Brexit, this could affect our employees and their ability to move freely between the EU member states for work-related matters. It is unclear what long-term economic, financial, trade, and legal implications the withdrawal of the U.K. from the EU would have and how such withdrawal would affect our business globally and in the region. In addition, Brexit may lead other EU member countries to consider referenda regarding their EU membership. Any of these events, along with any political, economic, and regulatory changes that may occur as a result, could cause political and economic uncertainty in Europe and internationally, and harm our business and financial results.
Our inability to attract and retain highly skilled employees could adversely affect our business.
To execute our growth plan, we must attract and retain highly qualified employees. We do not have employment agreements with any of our executive officers, key management, development, or operations personnel and they could terminate their employment with us at any time. The loss of one or more of our key employees or groups could seriously harm our business. In the technology industry, there is substantial and continuous competition for engineers with high levels of expertise in designing, developing, and managing software and Internet-related services, as well as competition for sales executives, data scientists, and operations personnel. We may not be successful in attracting and retaining qualified personnel. We have from time to time experienced, and expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. These difficulties may be amplified by evolving restrictions on immigration, travel, or availability of visas for skilled technology workers. If we fail to attract new employees or fail to retain and motivate our current employees, our business and future growth prospects could be adversely affected.
We rely in part on third parties for our help desk support and technology partnerships, and our business may suffer if these relationships do not continue.
We currently outsource our help desk support functions, which involve important direct interactions with users of our products. In the event that our vendor becomes unable or unwilling to provide these services to us, we are not equipped to provide the necessary range of help desk support and service functions to our customers. We also work with third-party software companies to allow our cloud-based platform to interface with their products. If we are unable to develop and maintain effective relationships with appropriate technology partners, or if such companies adopt more restrictive policies with respect to, or impose unfavorable terms and conditions on, access to their products, we may not be able to continue to provide our customers with certain platform infrastructure, which could reduce our sales and adversely affect our business, operating results, and financial condition.
We rely on third-party SaaS vendors in connection with numerous critical functions of our business, which presents risks that, if realized, could adversely affect our business operations and financial results.
We currently rely on third-party SaaS vendors in connection with many critical functions of our business, including enterprise resource planning services, customer relationship management services, enterprise cloud applications for human resources, and electronic communication services. Further, some of our cloud-based solutions are hosted by AWS. If any of these services fail or become unavailable due to extended outages or interruptions, or the security of our data stored with the vendors is compromised, or our own access to our data stored with the vendors is restricted or terminated, or the cloud-based services we use are no longer available on commercially reasonable terms or prices, our revenue could be reduced, our reputation could be damaged, expenses could increase, our ability to manage our finances, sales opportunities and workforce could be interrupted, and our processes for delivering services and supporting our customers could be impaired until equivalent services are identified, obtained and implemented, all of which could adversely affect our business.
We have been, and may continue to be, subject to claims that we or our technologies infringe upon the intellectual property or other proprietary rights of a third party. Any such claims may require us to incur significant costs, to enter into royalty or licensing agreements, or to develop or license substitute technology.
We have been, and may in the future be, subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of a third party.
We cannot assure you that our cloud-based solutions and the technologies used in our product offerings do not infringe upon patents held by others or that they will not so infringe in the future. Any future claim of infringement could cause us to incur substantial
costs defending against the claim, even if the claim is without merit, and could distract our management from our business. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. Any required licenses may not be available to us on acceptable terms, if at all. If we do not obtain any required licenses, we could encounter delays in product introductions if we attempt to design around the technology at issue or attempt to find another provider of suitable alternative technology to permit us to continue offering the applicable solution. In addition, we generally provide in our customer agreements that we will indemnify our customers against third-party infringement claims relating to our technology provided to the customer, which could obligate us to fund significant amounts. Infringement claims asserted against us or against our customers or other third parties that we are required or otherwise agree to indemnify may have a material adverse effect on our business, results of operations, or financial condition.
We may be unable to adequately enforce or defend our ownership and use of our intellectual property and other proprietary rights.
Our success is heavily dependent upon our intellectual property and other proprietary rights. We rely upon a combination of trademark, trade secret, copyright, patent, and unfair competition laws, as well as license and access agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring certain of our employees and consultants to enter into confidentiality, non-competition, and assignment of inventions agreements. The steps we take to protect these rights may not be adequate to prevent misappropriation of our technology by third parties, or may not be adequate under the laws of some foreign countries, which may not protect our intellectual property rights to the same extent as do the laws of the U.S.
Our attempts to protect our intellectual property may be challenged by others or invalidated through administrative process or litigation, and agreement terms that address non-competition are difficult to enforce in many jurisdictions and may not be enforceable in any particular case. In addition, there remains the possibility that others will “reverse engineer” our products in order to introduce competing products, or that others will develop competing technology independently.
If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. The failure to adequately protect our intellectual property and other proprietary rights may have a material adverse effect on our business, results of operations, or financial condition.
Our cloud-based solutions and services utilize open source software, and any failure to comply with the terms of one or more of these open source licenses could adversely affect our business.
Our cloud-based solutions utilize software covered by open source licenses. Open source software is typically freely accessible, usable and modifiable, and is used by our development team in an effort to reduce development costs and speed up the development process. Certain open source software licenses require a user who intends to distribute the open source software as a component of the user's software to disclose publicly part or all of the source code to the user's software. In addition, certain open source software licenses require the user of such software to make any derivative works of the open source code available to others on unfavorable terms or at no cost. This can subject previously proprietary software to open source license terms. While we monitor the use of all open source software in our products, processes, and technology and try to ensure that no open source software is used in such a way as to require us to disclose or make available the source code to the related product or solution, such use could inadvertently occur. This could harm our intellectual property position and have a material adverse effect on our business.
We could incur substantial costs resulting from product liability claims relating to our products or services or our customers' use of our products or services.
Any failure or errors in a customer's clinical trial caused or allegedly caused by our products or services could result in a claim for substantial damages against us by our customers or the clinical trial participants, regardless of our responsibility for the failure. Although we are generally entitled to indemnification under our customer contracts against claims brought against us by third parties arising out of our customers' use of our products, we might find ourselves entangled in lawsuits against us that, even if unsuccessful, may divert our resources and energy and adversely affect our business. Further, in the event we seek indemnification from a customer, a court may not enforce our indemnification right if the customer challenges it or the customer may not be able to fund any amounts for indemnification owed to us. In addition, our existing insurance coverage may not continue to be available on reasonable terms or may not be available in amounts sufficient to cover one or more large claims, or the insurer may disclaim coverage as to any future claim.
Current and future litigation against us, which may arise in the ordinary course of our business, could be costly and time consuming to defend.
We are from time to time subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our customers in connection with commercial disputes and employment claims made by our current or former employees. From time to time, third parties have asserted and may in the future assert intellectual property rights to technologies that are important to our business and have demanded and may in the future demand that we license their technology. Litigation may result in substantial costs and may divert management's attention and resources, which may seriously harm our business, overall financial condition, and operating results. Insurance may not cover such claims, may not be sufficient for one or more such claims, and may not continue to be
available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, negatively affecting our business, results of operations, and financial condition.
Our contracts with the U.S. government are subject to termination rights and other risks that could adversely affect us.
Because our U.S. government contracts and subcontracts are generally subject to procurement laws and regulations, we may not receive all of the future revenues we anticipate receiving under those contracts and subcontracts in the expected periods. Some of our government contracts are governed by the Federal Acquisition Regulation ("FAR"), which includes uniform policies and procedures for acquiring goods and services by the U.S. government. The FAR also contains guidelines and regulations for managing a contract after an award, including conditions under which contracts may be terminated, in whole or in part, at the government's convenience. These regulations also subject us to financial audits and other reviews by the government of our costs, performance, accounting, and general business practices relating to our government contracts, which may result in adjustment of our contract-related costs and fees. Any such future procurement actions by government customers are subject to risks and uncertainties, which could affect the allocation, timing, schedule, and scope of our government contracts and subcontracts.
Channel partners generate a significant portion of our sales.
We face ongoing business risks due to our partial reliance on our channel partners, including CROs and systems integrators, to generate sales. We rely on our channel partners for a significant portion of our revenue. These partners have considerable discretion in electing whether to utilize our solutions for their outsourced clinical trial management services. If our channel partners do not effectively market and sell subscriptions to our platform, choose to promote our competitors' products, or fail to meet the needs of our customers, our ability to grow our business and sell subscriptions to our platform may be adversely affected. Should our relationships with our channel partners or the effectiveness of our channel partners decline, we face the risk of declining demand for our services, which would affect our revenues and results of operations. In addition, if we are unable to maintain our relationships with our existing channel partners or develop successful relationships with new channel partners, or if our channel partners fail to perform, our business, financial position, and results of operations could be materially and adversely affected.
Unanticipated changes in our effective tax rate and additional tax liabilities may impact our financial results.
We are subject to income tax in the U.S. and various jurisdictions outside of the U.S. Our effective tax rate could fluctuate due to changes in the mix of earnings and losses in countries with differing statutory tax rates. Our tax expense could also be impacted by changes in non-deductible expenses, changes in excess tax benefits on stock-based compensation, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, the applicability of withholding taxes, and effects from acquisitions.
We are open to tax examinations in multiple jurisdictions. While we regularly evaluate new information that may change our judgment resulting in recognition, derecognition, or change in measurement of a tax position taken, there can be no assurance that the final determination of any examinations will not have an adverse effect on our operating results and financial position.
Our tax provision could also be impacted by changes in accounting principles and/or changes in U.S. federal and state or international tax laws applicable to corporate multinationals. Furthermore, changes in taxing jurisdictions' administrative interpretations, decisions, policies and positions could also impact our tax provision.
We may also be subject to additional liabilities for non-income based taxes due to changes in U.S. federal, state, or international tax laws, changes in taxing jurisdictions' administrative interpretations, decisions, policies, and positions, results of tax examinations, settlements or judicial decisions, changes in accounting principles, changes to our business operations, including acquisitions, as well as the evaluation of new information that results in a change to a tax position taken in a prior period.
Risks Related to Our Industry
We face significant competition, which could cause us to lose business or achieve lower margins.
The market for our clinical trial solutions is intensely competitive and characterized by rapidly changing technologies, evolving industry standards, and frequent new product and service introductions and enhancements that may render existing products and services obsolete. Accordingly, our market share and margins are subject to sudden declines. Some of our competitors have longer operating histories, greater financial, technical, marketing and other resources, and greater name recognition than we do. These competitors may respond more quickly than we can to new and emerging technologies and changing customer and regulatory requirements, or devote greater resources to the development, promotion, and sale of their solutions. New competitors may enter our market in the future, as barriers to entry are relatively low in our industry. Increased competition may result in pricing pressures, which could negatively impact our sales, gross margins, or market share. In addition, current and potential competitors have established, and may in the future establish, relationships with vendors of complementary products, technologies, or services to increase the penetration of their products in the marketplace. Even if our products and services are more effective than the products or service offerings of our competitors, current or potential customers might accept competitive products and services in lieu of purchasing our cloud-based solutions and services. Our failure to compete effectively could materially adversely affect our business, financial condition, or results of operations.
We depend entirely on the clinical trial market, and a downturn in this market could cause our revenues to decrease.
Our business depends entirely on the clinical trials conducted or sponsored by pharmaceutical, biotechnology, and medical device companies, CROs, and other entities. Our revenues may decline as a result of conditions affecting these industries, including general economic downturns, increased consolidation, decreased competition, or fewer products under development. Other developments that may affect these industries and harm our operating results include product liability claims, changes in government regulation, changes in governmental price controls or third-party reimbursement practices, and changes in medical practices. Disruptions in the world credit and equity markets may also result in a global downturn in spending on research and development and clinical trials and may impact our customers' access to capital and their ability to pay for our solutions. Any decrease in research and development expenditures or in the size, scope, or frequency of clinical trials could materially adversely affect our business, results of operations, or financial condition.
Extensive governmental regulation of the clinical trial process and our products and services could require significant compliance costs and have a material adverse effect on the demand for our solutions.
The clinical trial process is subject to extensive and strict regulation by the U.S. FDA and other regulatory authorities worldwide. Our cloud-based solutions and services are also subject to state, federal, and foreign regulations. Demand for our solutions is largely a function of such government regulation, which is subject to change at any time. Changes in the level of regulation, including a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, could have a material adverse effect on the demand for our solutions. Proposals to place caps on drug prices could limit the profitability of existing or planned drug development programs, making investment in new drugs and therapies less attractive to pharmaceutical companies. Similarly, the requirements in the U.S., the EU, the Asia Pacific region, and elsewhere to create a detailed registry of all clinical trials could have an impact on customers' willingness to perform certain clinical studies. In addition, the uncertainty surrounding the possible adoption and impact on health care of any GCP reforms could cause our customers to delay planned research and development until some of these uncertainties are resolved.
Modifying our cloud-based solutions and services to comply with changes in regulations or regulatory guidance could require us to incur substantial costs. Further, changing regulatory requirements may render our solutions obsolete or make new products or services more costly or time consuming than we currently anticipate. Failure by us, our customers, or our competitors to comply with applicable regulations could result in increased regulatory scrutiny and enforcement. If our solutions fail to comply with government regulations or guidelines, we could incur significant liability or be forced to cease offering our applicable products or services. If our solutions fail to allow our customers to comply with applicable regulations or guidelines, customers may be unwilling to use our solutions and any such non-compliance could result in the termination of or additional costs arising from contracts with our customers.
Consolidation among our customers could cause us to lose customers, decrease the market for our products and result in a reduction of our revenues.
Our customer base could decline because of industry consolidation, and we may not be able to expand sales of our products and services to new customers. Consolidation in the pharmaceutical, biotechnology and medical device industries, and among CROs has accelerated in recent years, and this trend may continue. In addition, new companies or organizations that result from such consolidation may decide that our products and services are no longer needed because of their own internal processes or the use of alternative systems. As these entities consolidate, competition to provide products and services to industry participants will become more intense and the importance of establishing relationships with large industry participants will become greater. These industry participants may try to use their market power to negotiate price reductions for our products and services. Also, if consolidation of larger current customers occurs, the combined organization may represent a larger percentage of business for us and, as a result, we are likely to rely more significantly on the combined organization's revenues to continue to achieve growth.
Risks Related to Our Common Stock and Our Debt
The price of our common stock may fluctuate significantly, and investors could see their investments decline in value.
Shares of our common stock were sold in our initial public offering ("IPO") in June 2009 at a price of $7.00 per share (on a post-split basis), and our common stock has subsequently traded as high as $88.87 and as low as $6.68 from our IPO through
December 31, 2018
. However, an active, liquid, and orderly market for our common stock on The NASDAQ Stock Market or otherwise may not be sustained, which could depress the trading price of our common stock. The trading price of our common stock may be subject to wide fluctuations in response to various factors, some of which are beyond our control, including:
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our quarterly or annual earnings or those of other companies in our industry;
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announcements by us or our competitors of significant contracts or acquisitions;
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changes in accounting standards, policies, guidance, interpretations, or principles;
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forward-looking guidance to industry and financial analysts related to future revenue and earnings;
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disruptions in our service due to computer hardware, software, network, or data center problems;
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general economic and stock market conditions, including disruptions in the world credit and equity markets;
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the failure of securities analysts to cover our common stock or changes in financial estimates and other metrics and modeling used by analysts in their research reports about our business;
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future issuances of our common stock, whether in connection with an acquisition, or a capital raising transaction; and
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the other factors described in these “Risk Factors.”
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In recent years, the stock market in general, and the market for technology-related companies in particular, has experienced extreme price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The price of our common stock could fluctuate based upon factors that have little to do with our performance, and these fluctuations could materially reduce our stock price.
In the past, some companies, including companies in our industry, have had volatile market prices for their securities and have had securities class action suits filed against them. The filing of a lawsuit against us, regardless of the outcome, could have a material adverse effect on our business, financial condition, and results of operations, as it could result in substantial legal costs and a diversion of our management's attention and resources.
Our actual operating results may differ significantly from guidance provided by our management.
From time to time, we release guidance in our earnings releases, earnings conference calls, or otherwise, regarding our future performance that represent our management's estimates as of the date of release. This guidance, which includes forward-looking statements, is based on projections prepared by our management. Our guidance is not prepared with a view toward compliance with published accounting and reporting guidelines, and neither our registered public accountants nor any other independent expert or outside party compiles or examines the projections and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.
Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We generally state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed, but are not intended to represent that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by analysts.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from our guidance and the variations may be material. In light of the foregoing, investors are urged to put the guidance in context and not to place undue reliance on any such guidance. Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances discussed therein could result in the actual operating results being different from our guidance, and such differences may be adverse and material.
Provisions of Delaware law and our organizational documents may discourage takeovers and business combinations that our stockholders may consider to be in their best interests, which could negatively affect our stock price.
Provisions of Delaware law and our fifth amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change in control of our company or deterring tender offers for our common stock that other stockholders may consider in their best interests.
Our fifth amended and restated certificate of incorporation authorizes us to issue up to 5,000,000 shares of preferred stock in one or more different series with terms to be fixed by our board of directors. Stockholder approval is not necessary to issue preferred stock in this manner. Issuance of these shares of preferred stock could have the effect of making it more difficult and more expensive for a person or group to acquire control of us, and could effectively be used as an anti-takeover device. Currently there are no shares of our preferred stock issued or outstanding.
Our bylaws provide for an advance notice procedure for stockholders to nominate director candidates for election or to bring business before an annual meeting of stockholders, including proposed nominations of persons for election to our board of directors, and require that special meetings of stockholders be called only by our chairman of the board, chief executive officer, president or the board pursuant to a resolution adopted by a majority of the board.
The anti-takeover provisions of Delaware law and provisions in our organizational documents may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.
As a public company, we may incur significant administrative workload and expenses in connection with new and changing compliance requirements.
As a public company with common stock listed on The NASDAQ Stock Market, we must comply with various laws, regulations, and requirements. New laws and regulations, as well as changes to existing laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and rules adopted by the SEC and by The NASDAQ Stock Market, may result in increased general and administrative expenses and a diversion of management's time and attention as we respond to new requirements.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our common stock and do not intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your investment in our common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. Shares of our common stock may depreciate in value or may not appreciate in value.
Our ability to generate the amount of cash needed to service our debt obligations or to obtain additional financing depends on many factors beyond our control.
As of
December 31, 2018
, we had $95 million outstanding under our Term Loan and $400 million of aggregate principal amount of Revolving Commitments available under our Credit Facility (defined in
Note 10
, "Debt," to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K). We may borrow amounts in the future and use the proceeds from any future borrowing for general corporate purposes, future acquisitions, expansion of our business, or repurchases of our outstanding shares of common stock.
Our ability to make scheduled payments of the principal of, or to pay interest on or to refinance our future indebtedness depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. Refer to
Note 10
, "Debt," to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further information regarding our Credit Facility.
Restrictive covenants in the credit agreement governing our senior secured first lien credit facility may restrict our ability to pursue our business strategies.
The credit agreement governing our Credit Facility imposes restrictions on us, including restrictions on our ability to incur additional indebtedness, grant liens on assets, engage in certain fundamental corporate changes, sell or otherwise dispose of assets, make certain investments and acquisitions, or pay dividends, and requires us to maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control. If we breach any of the covenants and do not obtain a waiver from the lenders, then, subject to the applicable cure periods, our outstanding indebtedness could be declared immediately due and payable. Further, following an event of default under our Credit Facility, the lenders will have the right to proceed against the collateral granted to them to secure that debt. If the debt under our Credit Facility were to be accelerated, it may have a material adverse effect on our liquidity and financial position and, further, we may not have sufficient funds to repay in full such indebtedness that may become due as a result of that acceleration.