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

Good morning, everyone. Welcome back to the William Blair Growth Stock Conference. I'm John Kreger. And our next session is Certara. I'm the analyst that covers Certara. And before we get started, I've been instructed to let you know if you need to see any disclosures or conflicts, please see williamblair.com. Here from the company is Bill Feehery, CEO; and Andy Schemick, CFO. We've got a half an hour of fireside chat format with Bill and Andy, so we're going to get going now. Any of you that are listening, if you do have questions, feel free to submit them to me and I'll do my best to get them into the discussion. So Bill, thanks again for joining us. I know this is the first time you've been here at our conference, and Certara is a relatively new public company. Can you spend a few minutes just sort of setting the stage talking about Certara and what you view as the core value proposition?

Yes. Thanks a lot, John. Certara is a company that focuses on biosimulation for use by the pharmaceutical industry to improve the efficiency of drug development. Our core technology is based on computer software that models how the drug -- how a drug, when given to a human, is transported and absorbed and metabolized and excreted from the human body. And we can use that software to run what we call virtual clinical trials. So we can model across lots of variations of humans, kind of just like in a real clinical trial. And we can predict what might happen and our pharmaceutical clients use this to ask questions about what's going to happen to their drug before it goes into clinical trials. They use it to design more efficient clinical trials. And it's used to answer questions even by the regulators. It's used extensively by the FDA and other drug regulators during the approval process. The software has been around for a long time. We started about 20 years ago. We've been building it up year after year, validating each feature showing that it matches what really happens in trials and in a real human. And as a result, we have an impressive client list using this. We have over 1,600 clients, including pretty much all of the top pharmaceutical clients have been using this for their drugs for some time.

Great. It seems like the pandemic last year was kind of a validation of biosimulation. Can you talk about how it was used in the development of vaccines or therapeutics against COVID-19?

Yes, thanks. We worked on approximately 40-or-so COVID programs last year. I'd like to think of Certara as we work on whatever the pharmaceutical industry is investing in and as investments shifted, we followed our clients into that. And we worked on many programs that were looking at existing drugs against COVID. There was a lot of hope, if you remember at the time, this time last year that we would find something, there were a couple of things that came out, and we played some part in that. And then we started -- we did work on some of the vaccines that were developed as well. The development of the vaccine was amazing -- the vaccines, that was an amazing feat by the pharmaceutical industry. I can't -- obviously, can't take credit for Certara, that was a much wider thing than us, but we were happy to play a small part in it.

Great. Okay. A frequent question that I get is penetration rates, just how broadly biosimulation is being used today. And it's a tricky question to answer since it can be used at so many different points in the process. So how do you think about that? Just sort of where you are in working with a specific company across their portfolio or following a drug through its life cycle of development.

Well, it's a good question because you can use biosimulation in quite a number of different places in drug development. The software itself is pretty complex. And after all, the human body is pretty complex. And so when you have a model like that, you can ask it different questions depending on where you are. So we will often be called in -- early on in the development cycle to answer questions about what's a first-in-human dose. Obviously, companies will be doing lab and maybe animal studies to determine that, but you can also use our software to get the first-in-human dose, which basically makes your earlier trials faster and more targeted. And as you move on to later-stage clinical trials, you can do different things. One is you can design your trials thinking about the types of people that maybe should be either excluded because your drug is unlikely to work, and therefore, that would be potentially excluded from the label claim or types of humans -- when I talk about types, I mean these are things like genetic subtypes, but also people with preexisting conditions, renal failure or liver disease, things like that as well as people who are older, younger, obese, different -- there's lots of different ways to think about types of people when you're looking at a drug. So people -- pharma companies will be using this to look at who -- not only who might be excluded, but if there are types of -- some subtype where we're just worried about it, we want to make sure there's more of them included in the trial, and that's become a big piece of this as we think about more inclusive trials over the last couple of years, how do you want to design the trial around that. As you get into very late-stage trials, we can use a software to simulate drug-drug interactions. It's a very common use for this software and allow -- and in fact, one of the ways that a lot of clients have found their way to us. If you do this, it's a direct substitution for what can be a very extensive clinical trial. And in many cases, the FDA has accepted that as a substitute, so that's why we get a lot of business that way. You can also do other things like we do translational studies between adults and children for pediatric studies. And we'll do work looking at predicting things like unusual side effects that might happen. So there's lots of different sort of decision points where we believe -- where we have, in fact, added a lot of value throughout the drug decision -- through the decision process involved in developing a drug. And I think we've demonstrated a lot of value given the fact that we have really a quite extensive client base and a tremendous amount of repeat business within the company.

That's great. And a follow-up to that, on the earnings calls, you give some statistics that sort of show you're able to grow your smaller clients and your larger clients. Can you just talk about what the tactics are behind that? What is the strategy to increase penetration rates into your clients and also across the whole client list?

Yes, yes. It's a great question. So we started as a small company focused primarily on the large pharmaceutical clients. And so we kind of, in some ways, we divide up the world between, let's say, the top 50 and -- which are primarily the big pharma companies. And then the other ones, the smaller ones of which there are really several thousand in the industry. So for the top 50, we have all of them as a client base. However, we believe with a lot of the justification that we're underpenetrated in them, and there's a lot of opportunity. And we focused our efforts around -- since for a lot of them, we are really a direct software supplier to them. We focus on extending the software. We focus on key account management as we look for additional places for -- most of those top 50 are quite complex organizations with many different buying behaviors and groups within them, right? So the other ones, which we kind of think of as biotech sector. We -- we've really been building that up over the last year or 2. And what we've seen is that there's a tremendous amount of demand for our software within them. We see a lot of people move from big pharma to biotech, and so they already know about Certara and we've been pulled in. And as everybody knows, there's a tremendous amount of funding in biotechs. However, they are often smaller organizations. They may only have 1 drug in development, and they don't have those internal groups that are required to buy, install and really make full use of our software. So for them, we have an internal group that is capable of basically using our software for them. They'll run the project for them. And that's a very efficient way of delivering the technology to them since, after all, they don't want to invest in a big group that's -- might only be used for part of the time for a company of that size. Because we've been underpenetrated in biotech historically, that's been -- they're growing a bit faster for us than pharma is. But in both segments that we're looking at, we are growing well in the mid-teens.

Sounds good. Okay. Let's turn to geographic differences. I think on the last call, you talked about very good growth in Europe and Asia. What's driving that? And do you think it can continue?

Well, I think, in Europe, we've just been a little bit underpenetrated. We've been increasing our hiring in Europe so that we have the ability to be more local. Obviously, there's big European pharma companies, there's a lot of activity there. And so it's just a matter of sort of getting our -- getting the footprint of the skills that we offer kind of balanced around the world. And so we've been seeing some growth as we catch up there. Asia is a little bit of a different story. We talked about Asia Pacific, where -- when we report, it's primarily Japan, South Korea and then China. Japan, we've been there for a long time. It's a nice, stably growing business. But China is really where we've been seeing some -- at least a good percentage growth on a small base. We've had some good demand for our software for some time from China even without us actually having a presence there. And we're -- we've been pulled by our multinational clients to actually have boots on the ground then. So last -- I think at the end of the fourth quarter last year, we opened our first office in Shanghai. We started hiring. It's a different world in terms of the -- where the pharmaceutical industry is in China and the ability to get skilled people, so it will take some time to build up a substantial group there. But we are seeing good demand. And as you said, on a percentage basis, we had really nice growth for the first 2 quarters there so far.

Great. Thanks. Relative to your business mix today, where do you guys think you're the most underpenetrated?

Where we're the most underpenetrated is -- well, that's a good question. I would have to say, just like I was saying historically, we got started later with the biotech sector. So I think -- and there's just -- there's a lot of funding. There's always lots of new companies coming in there. And so I think about it as we've got a little bit of -- maybe a little bit of more catching up to do there to catch up to where we are. But having said that, I believe that our #1 competition is really the white space. It's the people that don't use any biosimulation. And that exists in both big pharma and in biotech. And that's where we spend our time on. Of course, it's possible to develop a drug without a biosimulation. People have done that for hundreds of years. What it amounts to is you'll run the risk of just doing more and more expensive clinical trials. So we've been on a mission over the last 2 decades of our company's life to convert the pharmaceutical industry towards -- the way we think about it is, well, you certainly want to do clinical trials, but let's be smart about it. Let's go into that using all the data and all the science that's known about the biology before you go into actually testing a new drug on a human. And so there's lots more opportunity for that throughout the industry.

And I guess, to ask that same question a different way, if you think about sort of discovery, preclinical, kind of early clinical, late clinical and post approval, do you feel like you're getting sort of similar usage across that? Or are there any certain areas within the life cycle where you feel like there's a lot more white space to go after?

So I'd say that the bulk of our business is in the clinical phase. That's when we found the biggest use of biosimulation. And quite frankly, it is the phase in which the industry spends more money. I would say that as we go forward, one of the things we thought about is whether we would like to penetrate more deeply in, say, the discovery phase, where we have about 10% of our revenues in the discovery phase. And while kind of less money is spent in that phase, a lot of important decisions are made. And the way we think about our strategy is we'd like to start working with a drug as early as possible in its development cycle so we can bring the right product or service to that as it moves along. So that's potentially an area that we could think about increasing our penetration.

Great. Can you talk a bit about M&A? I know you've done a lot of deals over the last decade. Help us make sense of what you've accomplished. And are you kind of done? Or what are your priorities now that you're public and you've got a nice clean balance sheet?

Well, as you point out, I think we did 13 M&A deals ranging from small bolt-ons to more significant ones to create Certara. The way I think about it is there were really a couple of really transformational ones that happened to create the company the way it is now. So one of them was buying the core Simcyp technology a number of years ago. And then another was in acquiring the regulatory side of Certara. So regulatory side, it's not as -- sometimes it's not -- regarded maybe not quite as sexy as what we do in biosimulation. But that really gave us a big -- much bigger presence in our customers' thinking because it's impossible to work on biosimulation without getting into regulatory questions, right? Early on, you're making decisions, you have to worry about whether the regulator will accept that or not. And having that expertise has been what's really important. We also did a number of other deals that were sort of smaller bolt-on deals that either we bought interesting software, we could bring that to our existing customer base at a good period of time when we did some bolt-on deals, which were kind of like -- well, some people call them acquihires, where we could just -- we could rather than hire onesies and twosies, we could get a bunch of people at a time at a good price. Going forward, I think we're pretty happy the way we are. We've got good organic growth. We see the industry is healthy, and we think we can, given our backlog and what we're seeing, we believe that we're going to do pretty well. I mean that said, we also have a healthy balance sheet. There are certainly technologies that you could add in that would make sense over time to our clients so we could bring additional value. We have a private equity mindset and background, so we care a lot about value and what we pay. And so I think it just depends on whether something comes along at the right time at the right price.

Got it. Okay. And when we think about the technology deals that you've done, I assume, as a result, you're running multiple software platforms. How big of an issue is that? Are you trying to aggressively move to a common platform? Or is that not really a priority?