Certara, Inc. (CERT) Earnings Call Transcript & Summary

Hi, everyone. It's Dominique Schorn, European Healthcare Specialist Sales at Bank of America Securities. Today, I'm pleased to have with me Certara, CFO; Andrew Schemick; and CEO, William Feehery . I think just because it's a fireside chat, we'll kind of just go right into the questions, but maybe we start with a brief overview of Certara's biosimulation software and services business.

Yes. Thank you, Dominique. Very glad to be here with you today. And Certara is a biosimulation company. We started 20 years ago, developing software that allows us to simulate from a mechanistic standpoint what happens to a drug when it is injected or given to a human. So we're modeling the transport absorption and metabolism combination of drug. We have a pretty unique software. It's used in quite a number of uses. And one of the interesting features of it is that we're modeling, not just what happens in 1 body, but we can run the software in what we call a virtual clinical trial, so we can model across wide variation of people that a real drug would see a real clinical trial. So for example, people absorb different drugs differently based on their sex or their weight but also differently based on biomarkers or comorbidities like liver failure, for example. And we can provide a lot of insight into dosing to the drug action before a company goes into very expensive clinical trials. Our software is fairly big. It's been developed, as I said, over a long period of time. It's used extensively by our regulators. And we have a very extensive client list, over 1,600 pharmaceutical clients, including pretty much all of the top 35. That's just kind of a quick introduction to us. We are also participating in other parts of the drug development cycle. We have a regulatory business that's tied into this. And we're seeking to, over time, provide more and more decision tools to our clients, which help with those critical decision-making points during drug development at a point in which a lot of resources and money at stakes. We've built a great business. We've been profitable for a long time, and we are recently public back in December. Thank you.

Excellent. And maybe just also kind of part of the intro. You reported results last week. Maybe we could just have a brief overview of those as well.

Great. Well, maybe I'll give our CFO, Andrew Schemick, a chance here. Andy, do you want to comment on our results last week?

Thanks, Bill. Sure, happy to. We had a strong start to the year. We finished off a record year last year and followed up with solid results for Q1 performance. We had revenue growth of 16%, EBITDA growth of 20%. And I'm particularly pleased with that performance given it was our first quarter as a public company. And we were able to continue the momentum from last year as well as absorb our first full quarter of public company costs, while increasing our EBITDA margins.

Superb. Thank you so much. And I guess in your intro, you kind of mentioned you have a lot of customers now. And maybe you could just describe the level of interest in biosimulation and how that's changed at the customer level, the regulator level, now versus maybe a few years back?

Yes. That's a great way to look at it. So the foundation of our company was about 2 decades ago when a number of large pharmaceuticals decided that this software potentially had some use. None of them wanted to take on the considerable investment and time to create it all by themselves. And so that went on over time to become what Certara is today. Biosimulation, the way we're doing it is pretty complex modeling. When you do complex modeling, you need to create complex models. The trick is to really prove that they reflect the reality. So history has been, we've advanced the models every year. Every advance we make has to be proven against real clinical trial data, there might be clinical trials that succeeded. There might be clinical trials for a drug that failed. But the trick is that we're proving at each point that our models are accurate. And so every year, we get to answer your question, there's more interest and more acceptance of biosimulation. About 15 years ago, the FDA got very interested in this. They remain so today. And the FDA has hundreds of copies of our software, and we believe they use this on virtually every drug that is approved. So they've been a big proponent of biosimulation in general. And because Certara has pretty advanced and maybe somewhat unique product on the market, they've been big users of our software. That's a reasonably [ long foot ] in the industry and certainly, increases interest in us. But as we go forward, we keep expanding the use cases for biosimulation. There's always more therapeutic areas. There's more questions you can answer about dosing or about clinical trial design. And as that happens and as companies use us more in their drug design, obviously, interest go up. I think the pandemic last year was an interesting boost to us. Certainly, when you try and develop vaccines and drugs very quickly, more questions come up about how can you go faster, how can you make your clinical trials more efficient or have 1 year instead of 10, for example, to develop a vaccine. So we see a lot of tailwinds in the industry around the use of this technique and that's kind of reflected in the growth results that we just have -- recent growth results that we reported last quarter.

And just diving a little bit into more of what's driving that improvement. Maybe you could give some comments on it. Is it -- I guess you said -- mentioned time. Is there some element of accuracy of the model, or the technology or more publication? Maybe just diving a little bit more into the details there.

Yes. I think a couple of things are going on recently. One is the models are always getting more complex, more accurate, more useful and more importantly, more accepted. That's really the key that they're accepted as being valid by the industry and by the regulators. What's driving our growth more recently has been a couple of things. I think one is we're growing up as a company. We at one point were quite small. We did things like -- scientists did a lot of our sales. As we've gotten bigger, we've been able to start investing a lot more in sales, marketing and business development. We have been much more active over the last couple of years in targeting the biotech sector. There are obviously a lot of companies. We've already worked with virtually all of the large pharma companies. And while we seek to expand our business with each of them in terms of acquiring new logos, really, that's got to be in the biotech sector. We've been, I think, relatively underpenetrated there. That segment is also growing faster in a lot of ways than pharma is. So we've targeted them. We've done that a couple of ways. One is by investing in the -- there's a lot of companies out there. So you have to invest more in the sales and the marketing side to get the message out. There's always new ones coming up throughout the year. Second one is, what we found is that a lot of the biopharma companies are smaller. They may not want to invest in the large groups of internal experts required to really fund some of our software. So we've really invested a lot in what we call our technology enabled services. So what people -- part time investors here, services and I think is an attractive part of the business. But really the way we're thinking about this is we have this great technology. But we have different segments, different segments in the market, pharma companies. Big guys like to buy software from us. Smaller ones would like us to have some experts who can run the software or do the project, try to price it so that there's not a favoritism one way or the other from our standpoint in terms of pricing. And what we found is that we're getting a ton of growth on our tech-enabled services side because that biopharma segment is both growing faster and underpenetrated for us. We've had some questions about well, after growing services because I mean that your margins will overall drop in average. And the answer has been, well, actually, our services actually have quite high margins. On an EBITDA basis, we've grown our services fast within our software in the last couple of quarters, but our EBITDA margins have still expanded. So I think that kind of supports the thesis that this is -- business is really closely tied together, that we're pricing it kind of equivalently in a certain sense. And it's really opened up a really great opportunity for the company to continue to expand.

Thank you so much. And actually, while you were answering that question, which is very detailed. Thank you. I actually had a client question coming, if that's okay. And it reads how do the typical metrics of a deal look like from a customer perspective? And how big are the savings when using biosimulation compared to the classical method? And what are the main concerns of customers that they do not more often use biosimulation?

Yes, great question. It's a hard question to answer, and I'll tell you why. Because it's -- well, it's a hard question to answer because sometimes it's hard to know what you would have done if you didn't do biosimulation. So for example, sometimes we tell a customer that they should stop their drug development program right now that based on the simulation, it is likely to fail in the trial. So I could quote a really high number if they had continued, but it's hard to say. What we can generally say is that the cost of clinical trials is about at least half of the total cost that's spent to develop a successful drug. And so certainly, our software and tech-enabled services are a very tiny fraction of that. So we really only have to make small changes in the overall outcome to have a very, very good return on spending on our software. The other thing I can say is just generally, the industry has been going our way. Certara, I think is the largest biosimulation company out there. But we believe that the market, when we look at people who are doing things internally and people could be doing more of this, for example, it's probably $2.5 billion. So there's kind of been a big trend over time towards for us doing this because people in pharma have seen enough examples of where significant changes were made to clinical trials before you started based on this. So it's kind of hard to answer exactly with the decimal point and all, but I think there's a lot of evidence that the industry accepts that there is more value. I'm sorry, there was a second part to your question. So the other part? Andy, do you want to try to...

I think there was a question about the size of the average contract, if I recall that correctly. I mean, I'd like to address that by saying that the majority of our growth is derived from expansion within our current customer base. So we have programmatic relationships with our partners. And what we're seeing is essentially work orders drawn down under already negotiated existing MSAs. So the average deal size is in the hundreds of thousands. But with that said, I'm more focused on our annual customer value and increasing clients with annual customer value over $1 million and clients with annual customer value over $100,000. And seeing growth in those cohorts kind of supporting our expand within our existing customer strategies.

Thank you for taking that. Maybe also, can you discuss -- this is just a totally different topic. Can you discuss your plan on expanding Certara's platform inorganically? And maybe how does M&A factor into the business plan?

Yes. Thanks. So historic -- excuse me, Certara has historically done a fair amount of M&A in order to create the company we have now, I think we did something like 13 over the last 8 years. And it makes sense for what we -- the platform we created to consider how we would do that in the future. So I look at it in 2 categories. One is there's what I would call sort of normal course of business, bolt-on acquisitions out there where we can buy smaller companies that are doing some of the software -- and some of the -- particularly some of the services that we're doing. Generally, these are pretty attractively priced, given they're smaller companies. They cannot -- may not be banker deals, and we can easily integrate them. We have a lot of experience. So you should expect we'll do those where [Audio Gap]. You can see them in our past. We made one of them in the first quarter, a small company, but a great way to get 20 good people in a key market that we want to make sure [Audio Gap]. And when you think about larger, more transformational things, the way I think about this is that Certara has a really interesting platform right now. We have a really great customer base. It's very loyal. And once we acquire our customers, rarely if were to lose 1 for some reason or other. Customers ceases to exist because of M&A or because their drug doesn't work. We have already put together in a suite of products and services that go beyond just biosimulation, trying to acquire a drug early in its novel path, and stay with that and provide the right decision-making tool to it at the right period of time. So by now, we have some tools for discovery. We've got our core biosimulation services and software, which are primarily late-stage preclinical and clinical. We have a regulatory business, which is tied to that. And we acquired a market access business as well. There's other opportunities to kind of continue along that pathway to bring additional value to our customers since we're already with them. But it really depends on availability and just where price is versus what we can get at synergies and things like that. We don't have anything to announce now, but I do think as we go forward, we will see additional opportunity for the company.

Super. Thank you. And it's -- sorry, this is going back to something we discussed before, but I've had another question and kind of asking just to expand on -- you went through kind of your different relationship between major pharma and new biotech. And maybe you just could expand on that relationship, what services and technologies do each of them kind of use or not use. And maybe also how your customer base has evolved over time in terms of geography and how you see that kind of evolving over time as well.

Yes. So if we just make it simple and we look at 2 segments of large pharma and then smaller biotech companies, Certara has primarily 2 offer products. One of them is Simcyp, which I talked about in biosimulation. Other one is called Phoenix. The Simcyp is used by a narrower group of highly expert people, the price is higher. Phoenix is used much more broadly in the industry across large, small companies, CROs, regulators, you name it. So both the pharma and biotech generally would be Phoenix customers directly. Phoenix is a software license. So there is license copies of the software directly. Simcyp would be counted as a subscription. So the large companies generally are part of what we call a Simcyp consortium, which users subscribing to Simcyp, we recognize that revenue over the year. And there is large companies, that's kind of our past, they are -- they license the software, sometimes they ask for services to customize it. And even large companies don't maintain internal groups that are large enough that always handle all the work they have. So they do bring us in for services now and then as it's just -- they start to have a lot of drugs and lot of work all the time. Smaller companies, they'll also buy Phoenix from us. Generally, they will not be buying Simcyp or not be subscribing to Simcyp. They'll be doing a tech-enabled services project that will be tied specifically to their drug. They have more than 1 drug that generally is used in multiple projects, and then there can be multiple projects throughout the drug development cycle as they answer different questions. So for example, they might be asking questions about first in-human dosing early on and later on, the development cycle might come back and let us do a project on drug-drug interactions or answer questions that regulators will ask. So it kind of gives you a little bit of a flavor, take different pathways through us. But at the end of the day, core technology that they're both getting access to is the same.

Thank you. And you mentioned it here and there throughout the presentation. But on the regulatory side of things, maybe you could kind of dive a little bit deeper into that offering, the opportunity there and the competitive landscape?

Yes. So thanks. A couple of years ago, we added regulatory services to our offering. The reason we did that is because when you're in biosimulation, you -- even early on in development, you rapidly run into regulatory questions, because there isn't a point doing biosimulation to answer questions or design your trials if the regulators won't accept it. So we were called on to bring in regulatory advice early. So we got into the business that way. And then we found that generally, if you've been working with companies early on, answering regulatory questions around biosimulation, you have a pretty good chance of staying with them as they get a successful drug that needs to file an NDA and then they can peak that business pretty nicely. So our regulatory business is very profitable. It grows very nicely. It's not as highly differentiated. I think to be fair as our biosimulation business. There are, for example, CROs that have regulatory services that are sort of like that. But the big difference is that we have a really good way of kind of beating that business with work, right? So we're working early on with biosimulation business. There's a good reason to stick with us. And so although the services on -- the surface will look like what a CRO does. But generally, the types of customers that we're bringing into it are -- routes that they could get to us are a little bit different. I think that's why we've been so successful. But in general, that business is pretty capable and we're helping companies write and file INDs, NDAs, respond to regulators' questions. So I think it's become a very important part of the overall story that we can do more than just a science, but we can also help you explain that science successfully to the regulators who are ultimately -- they don't believe there's not much confidence.

Definitely. I mean, it seems like there's a lot of synergies between that part of the business with biosimulation and market access. Maybe that could just see how you see these synergies, revenues versus costs.

That's a bit -- well, maybe I'll ask our CFO for that one. So how do you want to think about, Andy?

Well, the company is -- operate as a single segment. So in terms of synergies going forward, the first order of priority, the first driver of our growth algorithm is really expansion within our current customer base, large pharma and biotech. So we still see a big opportunity in terms of cross-selling and expansion within our installed base, and we see that each year in our repeat rate for our services business growing mid-teens. So strong results there, but there's still opportunity going forward. It also allows us to bring a more end-to-end solution to kind of the second piece of our growth algorithm, which is to land new biotech customers and then expand once they're on board. We added a significant number of new logos in the first quarter. We're seeing positive trends there as well. It's also an opportunity in terms of global expansion. So the company's roots and the majority of the revenues historically were in North America. So in some of the international locations where we operate, we may not have the full end-to-end solution in place and see revenue synergy opportunities there as well. We've also seen some innovation around the linkages between the clients and opportunities, kind of the fourth lever I would look at, which in terms of new products or new offerings.

Yes. And to that, I'd say we are changing this, but historically, we've built Certara with very -- with surprisingly little investment in sales and marketing. That's kind of like -- it's kind of indicative of effectively, the regulatory business is able to bring in clients without doing a lot of -- as much external sales. The reason I'm a little bit hesitating there is we are changing that. Particularly after the IPO, we have -- we recognize there's significant opportunity for incremental sales and marketing and business development resources as we expanded in biotech and as we get to be a bigger and more mature company. So -- but to just address your point, though, the fact that we're able to do that kind of indicates there are pretty good synergies across those two.

And I think we have just a few minutes left, so I have 1 more question. I imagine through the IPO process, post-IPO process you've been speaking with a wide variety of investors, from healthcare to tools, to tech. Just curious on if you could give us maybe just a flavor for that. And maybe if they have different approaches to how they do valuation or what KPIs or metrics they look at across the different types of investors.

Yes, it's a good question. So we -- I think we do have a lot of interest from several different types of investors. The core healthcare investors, I think, are intrigued that there's this segment that maybe they were not fully aware of that was out there because we're private for so many years. And that it may indicate that there's a bigger simulation market, and there are some other companies that are out talking about that. I think a lot of the healthcare investors are asking questions around the, well, how do we expand the use cases for this? How do we expect therapeutic areas? And where else can we go around in terms of our product suite? The technology investors, they I think are intrigued by the fact that we are actually a quite profitable company, yet we're growing nicely. We have had some questions around, well, is there a trade off there? And our answer has been we are both profitable and growing. We're quite disciplined. And I think Andy and I are both very comfortable with what we're doing both in terms of generating profits and reinvesting in the business to grow. But I think those are kind of the 2 areas we get. I think there's a lot of excitement that pharma is changing a little bit. We're starting to do things a little bit differently. We're kind of an indicator of the increased efficiency that is likely possible across the industry. And that's driving a lot of interest in our stock. I think also -- I think a lot of the healthcare investors, not a lot but I can tell have done a lot of diligence on us and called customers and found out that, in fact, we do have quite a broad customer base, most companies to get a drug. Personally, all of them to get a drug approved or working with Certara in some way or another. And so that's pretty attractive to that point. Did I miss anything, Andy? Is there...

No. That was great.

Well, I think that time's up, actually. Thank you guys so much for coming, Andrew and William, and we look forward to hearing form you next.

Thank you very much. Appreciate it.

Thank you.