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

Certainly, the -- given the bookings performance in the first quarter, the visibility overall increased, which is why we kind of moved up the bottom of the range. I did -- I mentioned earlier, but I'll reiterate, we saw some lengthening and project start-up time on the regulatory side. I'd like to see that come back. We had a strong bookings quarter there. But from a revenue perspective, the conversion was slower than historical on non-COVID regulatory work. The key thing we look at is our bookings, the majority of our bookings convert to revenues in 12 months or less. So I tend to look at the quarter, but I also look at the trailing 12 months. On a trailing 12-month basis, the bookings growth was a little over 20%. And given about a 3% to 5% factor for cancellations or delays in that number kind of points us to that mid- to high teens range. Another quarter of strong bookings would certainly significantly increase the visibility.

And then maybe while we're on that -- thanks, Andy. And while we're on that subject, one of the questions that does come up is the strength in bookings on the services side and the shift in mix towards services is a lower -- relatively lower margin line -- high margin as services go, but lower margin than your software. What are some of the efficiency initiatives or mitigating factors that allows you to maintain margin in the face of that mix shift headwind?

Well, the first thing I'd say is, although we did not -- right now, we don't break out the EBITDA margin by segments. Our services EBITDA margin is quite high. Obviously, software has a higher gross margin than services, but software has R&D and a different selling model that has to be accounted for. So when you get down to the EBITDA line, there -- they're a lot closer than you think. And I'd point out that even though services grew a little bit faster than software, our EBITDA margin actually expanded in that time, which kind of reflects that. Now to your question about efficiencies, the company -- we came from the history, we were small for quite some time, and we've -- as biosimulation has been accepted, we've been growing rapidly. That's given us a lot of opportunities for -- to implement efficiencies so far and we've got more in the future. So a couple of the things were going on. One is we're investing a lot more money in sales and marketing and business development. It's pretty common for, I think, companies after an IPO. But in our case, we want to make sure that we've got a high profile in the industry with our customers and also in the market for talent, which we're always on a hunt for. We are kind of professionalizing the internal organization of the company. We've invested a lot in the infrastructure in terms of our IT systems. So we've got one IT stack, where we're able to track drugs as we find them early in their development phase, and we know where they are as they're moving on and we can bring the right product, service and person to that as they move through development. We are expanding our training and our professional development, which kind of allows us to bring in people a little bit more junior in their career path, and we can -- we've got a good -- that expands our ability to bring people in and to kind of serve our clients in a more cost-effective way. And there's more to be done on that as we go forward and as we get bigger. There's a lot of operational efficiencies we can gain as we continue on our growth journey here.

Got it. So let's pivot a little bit and talk about new products. In the last quarter call, you talked about some investments in your biologics simulator. I think you also kind of announced the rollout or the launch of the secondary intelligence product. Maybe you could describe how those complement your existing base of capabilities and what has been the initial customer reaction to those.

Yes. That's a great question. So These products have been under development for some time. We're pleased to kind of get them out there and talk about some new things in the quarter. We've obviously been working on with biologics for a long time, and the simulator software has been advanced and modified for that for years now. With the Simcyp biologics product, what we've done is we've kind of recognized that there are these 2 -- we've seen these 2 segments. One is big pharma that likes to buy software from us. The other one is the small biotechs that might like to buy a tech-enabled service, where we run the software for them. There's also a group in the middle of companies that aren't big pharma, but they might have come from pharma. They want the software. And so what we've done is we've made a tailored version of the software for that segment, where it's a little bit more cost-effective, and it's a relevant subset of the features of the full thing that would attract that segment. So kind of expanding our reach in different segments of the pharmaceutical market. When -- what we call our new secondary intelligence product is something different. It's a completely new product. And that one, what we're doing is we're using our kind of core simulation technology. But rather than talk about the target that the drug is aimed at, what we're doing is we're looking at all of the, what are called the secondary pharmacological targets that a drug might also hit that you don't intend to. So that's what leads to side effects. And if we can provide some information early on about what side effects a drug might have, I think -- we believe that, that could be quite valuable to the industry, and it's kind of a unique software offering, I think, it depends if this is -- we believe it's the first of a kind. This opens up kind of the world of the toxicologists and the safety pharmacologists as kind of an expanded market for Certara. And we have several kind of like you do in software, we've got multiple versions of -- we've got a pipeline of multiple improved versions coming out. So the first version, I think we had around 15 secondary targets in the software. By the summer, we expect to have over 40, and we're to keep going on there and just making it more and more relevant to that market segment and the questions they take. But we're very excited about it, but it will take some time to -- for people to understand what it is and hopefully start using it. But I think we've gotten a pretty good market reception compared with what we had expected so far.

Excellent. That's encouraging. So to follow up on this, at the top of your answer, you talked about this product having been in development for some time. Given that biosimulation is new, Certara is new to us as public investors. Can you just drill in a little bit more to product cycle? How long does it take to develop a product like that? It sounds like you've got some versions teed up to bring out. And then when you think about adoption rate, what's that curve look -- what does the product cycle in the market look like until it gets to some state of maturity?

Right, right. Great question. It's not always kind of a consistent answer, depending on what the product in the market is. In that particular case, to make that happen, we needed to hire some people that -- it wasn't just that we repurposed our technology, but we needed to get some of the experts in the industry who understood the problems and the uses that we can take into and have that kind of dream on, on really what is a brand-new product for them. I believe that we started that years ago, more or less. And so that's maybe not a perfect answer, but a lot of these -- it's difficult to start a completely new product in less than about 2 years or so in our history. Now of course, We put out significant new features every year. We've been doing that for the last 20 years, and we've got an entire infrastructure buildup around continuing to do that. But to some extent, it takes a slightly different group and a different investment to kind of put out something totally new. So what we'd like to do is to see our regular advancement of our core products that the industry depends on, continue to march along every -- and most of them, it's every year. Occasionally, it's a little bit more frequent than that. And then if we can get out let's say, 1 or 2 really new products every year, I think we would be -- we will be doing pretty well.

Excellent. So -- and on that front, the other area that I've heard you put some emphasis against is QSP or -- and specifically some disease-specific consortia that you're standing up. How much importance should we put on those? How significant are those in terms of their market opportunity?

Yes. So if you go into the scientific literature in the pharmacology areas, and I'm not suggesting you do that, but if you go to the one of the conferences, I mean, QSP is all that's talked about. This is where all the attention is going, it's where all the excitement is going. And so -- and the reason is because we're taking the kind of the core biosimulation idea. But QSP, to some extent, is really narrowing down on what's going on in the biology of that specific disease target. And so it extends the -- it extends the concept quite considerably, although it does also focus it down as we have to focus much more narrowly on disease targets. We've set out to build a significant QSP group. We talked about some of the growth, which has been very impressive. And it's enabling us to tackle new therapeutic areas. So one of the very exciting areas that QSP lets us get into is in cell and gene therapy. There's a lot -- obviously, there's not that many approved cell and gene therapy products, but there's a big pipeline in the pharmaceutical industry. And for a lot of them, there are difficult questions about dosing, given that you can really only dose the patient one time in their, maybe in their lifetime with that drug. And the dose may vary by individual patient characteristics. So developing those models has been very important for the development of some of these things, and we believe could lead to a nice position for us as we continue there in the future. And all of this is leveraging the software and the kind of the body of scientific knowledge that we've incorporated in all of the existing biosimulation market. So just a very exciting extension into the kind of the new therapeutic areas that the pharma is going on and our ability to kind of provide more resolution and more detail in the questions they're asking.

Excellent. And we're basically out of time. But just to follow up on that last, that body of information point that you made, is that proprietary to Certara, that body of information? Or does Certara, by virtue of its size, have an advantage in terms of the accumulated body of information that it has?

Yes. A lot of the information we have is the sort of the accumulated known science that has been developed. However, developing these models is a tough one because you -- every individual, little step has to be validated against data. It takes a long time, and we have a conservative industry that wants to know the models are accurate before they base big decisions on them. And so a lot of -- one of the big advantages that we talk about for Certara in the industry is that we've got 20 years of every year pushing this forward, validating and proving that these models are accurate, convincing both the regulators and the pharmaceutical industry that they would make big decisions based on them. And that's a significant competitive moat that's maybe even better than having like one great big patent or something like that.

Excellent. I appreciate your answers. As I said, I think we're out of time. I'm more informed than I was 30 minutes ago, though. So thank you very much. Appreciate your attendance and the audience's attention. I wish you all great afternoon and great weekend.

Thank you very much. We really enjoyed it, David.

Yes. Thank you. Good to see you.