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

Great. Thank you, everyone, for joining. Let's go ahead and get started. My name is Vikram Purohit. I'm one of the biotech research analysts with Morgan Stanley. I'm very happy to have with me Bill Feehery and Andy Schemick, CEO and CFO of Certara. Bill and Andy, thank you for joining us. Appreciate your time.

Thanks, Vikram. It's great to be here.

Yes. And before we go ahead and get started, I just need to read a brief disclosure. So for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. So with that, let's go ahead and get started. Actually, one more note for the audience. If you have questions, you can enter them through the online portal that you should have access to, and I can see the questions you're submitting. So if you'd like me to relay any questions to Bill and Andy, please feel free to submit them, and I can weave them into the conversation here. So Bill, maybe we could just start with -- especially for those in the audience who may not be fully familiar with the Certara story and with the biosimulations space more generally, maybe you could just start with some opening remarks about the business and some of the key milestones you think the company has hit this past year.

Yes. Thanks, Vikram. I appreciate it. So for those, just as a quick introduction to -- 5 minutes for the company, we focus on biosimulation. What we have is a -- the core technology of the company is a very sophisticated computer model of the human body, of all of its different organs and systems. We started developing it about 20 years ago. It's used for simulating clinical trials before you actually do clinical trials. It's very useful in many different stages of drug development because effectively, what we can do is we can work with limited data, and we can make predictions about what will happen as that drug moves forward in its development. If you have some pretty good predictions based on all the known science, you can make appropriate adjustments to your development of your clinical trial strategy, which can be -- which is going to add a lot of value, save a lot of time, change the probability that the drug will actually be approved. Our software takes into account both the known science and also what's known about the variations in human populations that you will encounter in a clinical trial when you go out into a big population. And we're -- we've been successful in informing over 200 drugs over the years. Most -- we've -- there's a lot of tailwinds from the regulators, from the FDA and -- for biosimulation in general. And we continue to expand the use of the software in terms of additional therapies, additional types of drugs, additional technologies as the pharmaceutical industry is evolving. We also have expanded our offerings so that -- we have an end-to-end product portfolio. So our strategy is to work with the drug at any point of development. We can start working with it and then stay with it as it moves through development. So we have products that span everywhere from discovery to post-approval. But still, with this idea of providing information to our clients about the known -- the known science that they're -- that they can take advantage of as they consider their strategies and how they're going to spend their money to get this drug approved. So I'll stop there. Just in terms of big milestones, we -- obviously, we went public. We had our IPO last December. I think it was very exciting for the company after 20 years to reach a higher profile, and that's been very valuable for us. One of the things for a newly public company is to show that you can explain the model to people and then you can hit your numbers. So I think we've done -- I'm very proud that we've -- we're hopefully developing that reputation as we went through our first year as a public company. We just announced our first major acquisition in some time, Pinnacle 21, $310 million of cash and stock for a really great software company that will be accretive to our financial measures, whichever one you want to talk about as -- and we're very excited to close that and bring that into the company as we go forward. So thanks for the question.

Great. So going back to your point about tailwinds, maybe we can dig in on that a little bit. I'd be curious to hear your perspective on what you think have been some of the key tailwinds driving the adoption of biosimulation over the past, let's call it, 3 to 5 years. And then looking forward, what are some of the secular themes that you think will help more biopharma companies in corporate use of biosimulation within their day-to-day processes?

Yes. I think that the tailwinds are really twofold. So one is we are sort of the disruptor in this field, if you think about it, because the pharma industry has been very successful under the idea that the gold standard is a double-blind clinical trial for proof of drugs. And that's not changed. But clinical trials have gotten more and more expensive. They get bigger. There's patient limitations. There's all kinds of reasons why you would like to do this as efficiently as possible. That resonates well -- started resonating well 20 years ago when we got started. But some of the tailwinds that have helped us is, one, is the models have gotten to be sophisticated enough to be accepted to be highly predictive of what's going to happen, so they're useful. And then the second one is I think that the regulators have, I think, very reasonably decided that biosimulation is something to be encouraged in the industry. If -- there's no reason to do more clinical trials than necessary for a drug. So if you can avoid them by either making use of known science, by making a better design or in some cases, by determining the drug will be unlikely to succeed, that's good for society and therefore, something that regulators are interested and encouraging. I think a lot of the regulatory agencies are very cutting edge on the science, and this kind of falls in that as well. So the other tailwind that we see has been really around FDA acceptance of biosimulation, which started probably in the early 2000s and has kind of grown in scope since then. So they don't accept biosimulation everywhere, but every so often, there's gradual pushing of the boundaries. And so that space becomes bigger and bigger for us, and that's been going on for some time.

And on that note, there's been a fair amount of investor interest in understanding the TAM for biosimulation. How do you think about that from both a U.S. and an ex U.S. perspective?

Well, for the core biosimulation TAM, we estimate is around $2.5 billion or so. Obviously, we are a -- we probably are the biggest certainly public player in that market, but we're not -- there's still a lot of space there. The rest of it is -- we do have some -- obviously, we have some competitors, but there's a lot of internal activity, in particular, in big pharma companies here where they're doing their own modeling. So we're part of a bigger industry. As far as breaking it down U.S. and ex U.S., I'm not sure I have the number right on top of my tongue here, but I'd say it's a -- Certara is pretty equally penetrated, I'd say, in U.S. and ex U.S. companies with maybe the exception of Asia, where we're -- we've recently put our footprint and we're hopefully hoping to grow, and we are seeing some growth there. But I think Certara as a whole has been a pretty good -- what we're working on, it's been a pretty good proxy for the location and the types of R&D that -- sort of the overall pharma industry, including biotechs that are putting in. So we do see about 70% or so of our revenue kind of in North America based with maybe 20% in Europe and the rest in Asia Pacific, which I think is not too far off where -- with the exception of Asia of what we're seeing in the global industry in terms of pharma spending.

Great. And have you seen the mix of users of your biosimulation software and services change over the past several years? And have you seen any notable shifts in which therapeutic areas, people may be employing more biosimulation in?

Yes. So due to our history, we started out kind of as a software company where most of our clients were big pharma companies. And most of the big pharma companies that are out there, I'd say virtually all of them are our clients today. So just mathematically then, we're underpenetrated in biotech. And so that's been a big thrust of ours over the last couple of years as we got to be a size where we could invest in the, frankly, just different marketing and sales capabilities that you need to reach a large number of biotechs is kind of always changing out there. So our mix has been changing a bit there as we've started to make more inroads in the biotechs. It's very exciting. There's lots of funding, lots of great companies have arisen and used biosimulation and become even significant customers for Certara. But it does require a little bit different marketing footprint in terms of just finding it at the right point. So hopefully -- did that answer the question there?

No, that's helpful. That's helpful. Maybe one kind of last big picture question, and then we can talk a bit more about kind of unpacking some of the specifics of the business. But just to help everyone get a better feel for how Certara does business, could you kind of walk through who the typical user is of a biosimulation software or a service offering? And what does the typical customer sales life cycle look like with Certara from when they initially start working with you to the point where they're expanding and using potentially multiple different things that are available within the Certara umbrella?

Well, Certara's strategy is to have a portfolio of products so that we can be relevant to a drug at any point in its development cycle and then ideally stay with that because we'd love to catch drugs as early as possible. It doesn't always happen, but we do have products and services where that's relevant. And we're still making most of our money in the clinical phase. That's where most money is spent. So there are many different pathways depending on when some -- when we find a project and a little bit different based on the types of customers that are out there. So in terms of big pharma companies, we are selling software to them. And so the kind of the core biosimulation groups have long-standing relationships with us and have incorporated the software and generally are quite active in proposing new features and new versions of this as we go forward. We also do services for them. In many cases, those kinds of services and biosimulation might be if they want technology that's going to be proprietary. So they're not going to put it in the main software -- they don't want us to put it in the main software. It's available to everybody. We're going to work on something very specific to their drug. So we'll see that happen. On the -- on biotechs and on projects where we start working on the drug, a very common place where people learn about Certara for the first time tends to be on drug-drug interaction studies because biosimulation has been accepted in a lot of cases for that. And so a lot of times, even a company that doesn't know about us will find a recommendation, and we'll start working with them then. It's great for us. It's a little bit late in the cycle. We prefer to come in early, but it does pull people in. And we also have a regulatory arm. I think of the regulatory arm as a little bit of a force multiplier. It's also necessary for Certara. So we pull people in sometimes in that stage, and that's where our acquisition -- we can talk about plays in place. But kind of the way to think about regulatory is when you're working on biosimulation, there will inevitably be regulatory questions around whether the FDA will accept this strategy, and so we have to be credible. It's also a natural feeder in terms of when we work on a biosimulation project, and we know everything about that project to go on and do the regulatory work, becomes hopefully a natural extension of what we're doing. So we don't tend to acquire new customers so much in that area, but we tend to kind of magnify the work we've done with the existing biosimulation ones.

Great. That's helpful. And since you just mentioned the Pinnacle 21 acquisition, why don't we just pivot there next? So again, for those in the audience that may not have seen the news come across, could you just kind of recap what kind of drove the rationale for the acquisition and what you think kind of -- what do you think it adds to the business?

Yes. So look, Pinnacle 21 is, I think, pretty well known in the pharma area because they build up a great software product that enables companies and enables the FDA to validate compliance of submissions to CDISC standard. So a number of years ago, the FDA started to require data and clinical data submissions to come in, in what's called the CDISC data standard. The fundamental reason for that is because when that data comes in on the standard, then the FDA is able to process it and make data queries and basically handle it. And they use Pinnacle 21 as a way to determine whether companies haven't submitted their data and met that standard. We knew of this company as a lot of companies do in software because it's used so extensively. And we were -- when it became available, we were fortunate to have the capability to move quickly and to win this one. We believe that, number one, tying that software to our other key software products adds a lot of value. It's also a great company in its own rank. And number two, there's a bigger trend here around data standardization just in clinical and preclinical development that we believe will -- just like the FDA likes to standardize data so we can process it. If pharma companies were to standardize more a little bit earlier in the process, a lot of the workflow would be simplified. So we think that there's kind of the short-, medium- and long-term opportunities for us with this property. It's accretive to us. I mean I can turn over to our CFO, but it's a great SaaS software company. It's accretive to Certara on pretty much all the financial measures that we could talk about. So I think it's going to -- we're very excited to -- we hope to close it at the beginning of our fourth quarter.

Yes. And then actually, maybe on the financial metrics, that would be helpful to talk about a bit more. I think you've mentioned that you expect the company to contribute roughly $30 million in incremental revenues. I'd be curious if that represents a contribution from the company stand-alone? Or does that bake in any synergies or cross-selling across Certara and the Pinnacle 21 platforms?

Andy, do you want to take that one or...

Sure. So the $30 million revenue expectation for next year is on a stand-alone basis. We're somewhat limited on the information we can provide in advance of closing the deal, given it's a private company. But what we said at this point is the expectation is $30 million of revenues not including synergies and growing 30% plus year-over-year and accretive to our overall company revenue growth, EBITDA margins and free cash flow conversion.

Got it. And in the longer term, how do you expect the acquisition to impact your business mix across software and services?

Over the short term, it's expected to add about 500 basis points towards the software versus services mix growing at a rate -- high overall growth rate. We expect it to continue to be accretive from that perspective. But we also -- we can get into this, but we also see opportunities in terms of synergies to our other software that can accelerate their growth rates as well.

And how much overlap do you see currently between the 2 companies in terms of user base, product offered? And I know it's early days and you might be a bit limited in what you can say. But how much cross-selling potential do you think there is there? And is there an example that you could point us to for something that would be an interesting cross-selling opportunity between the 2 companies?

Yes. So I think there's a big overlap in our customer base and in our selling point with Pinnacle 21. As you point out, it's still early days. So as we close this deal, we have some opportunities here to go and implement that. But we are quite active with -- so Pinnacle 21 has a free version of the software and they have an enterprise version of the software. The enterprise version of the software has a huge overlap with customers and particularly, the ones that have successful drugs where they are going all the way to a drug submittal with the FDA. And so it's -- we think it's a natural opportunity for us not only to sell Pinnacle 21. But as we get past the short term and we start to integrate this with our products to provide actual increased value in terms of integrating validation with some of our products and some of our services. I'm going to hold off a little bit on giving you a specific example until after we close. We will talk more about it after we close, and we've got some more additional ability to talk about the company.

Sure. Understood. That's helpful. I guess staying on the topic of developing the business but outside of the Pinnacle 21 acquisition specifically, what are some of the key areas of unmet need or some of the key features that you hear about from customers that biopharma companies think is still something that currently available biosimulation software and services don't meet the need for? And a related question to that, what are some of the interesting areas of research that you're prioritizing internally for new product development?

Okay. Let me take 2 of those. So if you look at unmet needs, there's a couple of ways to think about that. So one is, despite the fact that the company has been around for 20 years, for a lot of that 20 years, we were not a very large company. And so we have not pushed biosimulation in every nook and corner of the possible therapeutic areas or technologies. And so every year, we're expanding that. And I believe as biosimulation become more accepted and we've gotten bigger, we're slowly -- our aim at least is to accelerate that, right? So every year, we're pushing into more and more areas. A couple of examples recently as -- we've made big investments in immuno-oncology. And in general, it sounds the same but differently, but in immunogenicity, which takes us into 2 big pharma areas where there's lots and lots of activity. We've obviously made investments recently in vaccine simulators, which have obviously reached a very prominent level in pharma. And we're doing things like getting into neurodegenerative diseases, where there's obviously a huge demand, but a lot of scientific questions about how -- that the pharma industry wants to address as we go forward about how do we make better and better, for example, Alzheimer's drugs. In terms of like the bigger picture here, I think -- so if you look at it, so one answer that people will talk about is, okay, well, is biosimulation available in whatever therapeutic area? And has it gotten to the point where the FDA would allow me to use it, right? So they always want more and more there. Then I think the second one is there's kind of a bigger trend going on around. There's a lot of companies out there who are working on machine learning, AI techniques. Certara is really -- most of what we do is really based around mechanistic modeling, so we're modeling the known science. At some point -- and we're moving that area that makes sense -- we're moving in that area that makes sense to marry the 2, right? So we'd like to model all the known science and then use AI for -- see if we can push it further. And that's maybe a little bit longer-term opportunity, I think, for the industry and hopefully, for Certara as we go forward.

And actually, we just got a question from the audience on that specific topic, which you just partially touched on, but maybe you want to add to that. The question is, how does biosimulation that Certara provides fit within the landscape with effectively some of the other discovery companies out there like a Schrödinger?

Yes. So a lot of the biosimulation companies that are out there are more complementary to Certara than really competitive. So Schrödinger's software is used by a lot of our customers in a complementary fashion. In some cases, we're sort of using the outputs of their molecular simulation as some of the inputs we'd like as we're modeling PBPK and doing virtual clinical trials. So it's kind of an early stage market. The pharma industry is moving towards more and more modeling overall, and there's lots of places that it becomes valid and different companies are pushing. So I think there's a lot of complementary -- I realize it's a little bit confusing for competitive -- for investors because at this stage, like a lot of these products are more complementary than really head on competitors right now.

No, understood. Maybe in the last couple of minutes we have left here, we could talk a bit about some of the key guidance metrics you've laid out for 2021. I just wanted to make sure that everyone had a chance to hear that from -- maybe from Andy.

Yes. So we provided some updated guidance based on essentially having greater visibility into the year or halfway through the year. For those who are new to the story, our bookings are a good metric to derive expected future revenues given that our bookings convert to revenues in 12 months or less. So with the benefit of TTM bookings of about 26% as of June 30, we were able to have visibility into -- at the midpoint of the new revenue guidance range, about 17% revenue growth for the year, and that's not including the impact of Pinnacle 21 to the extent it closes early in the fourth quarter.

Great. And with that, Bill and Andy, we are actually out of time. So I just want to say thank you for joining us. Very much appreciate it. Thank you to everyone in the audience. I appreciate you joining the session. And we're going to close off and the next session starts in about 15 minutes. Thanks.

Thank you.

Thank you, Vikram.