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

Okay. Great. I think we can go ahead and get started here. Good afternoon, everybody. Thanks for joining us today at the Baird Healthcare Conference. For those of you who don't know me, my name is Vikram Kesavabhotla. I'm part of the research team here at Baird, and I lead our coverage of the health care, technology and services sector. Very excited this afternoon to be hosting Certara at our conference. And with us from the company today is Andy Schemick, the Chief Financial Officer. Just to level set here, we have 30 minutes scheduled for this session. So we'll be wrapping up at around 5:25, and I'll be structuring most of this as a fireside chat. Certainly, a lot of topics to cover here, a very exciting time for this company. But I guess maybe just to kick it off, Andy, it'd be helpful, especially for those in the audience who maybe are not as familiar with Certara, if you can just give us a quick kind of overview of the company, and we can sort of dive in from some more specific topics from there.

Okay. Great. So thank you and I appreciate the opportunity to present. So I'll talk about Certara. I'm the Chief Financial Officer, Andy Schemick. Certara as a company is the leader in biosimulation. The primary goal of the company is to leverage our core technology to accelerate medicines by transforming the traditional drug development process. I'll give a brief touch on the history. So the company was formed in 2008 when Phoenix and Simcyp software platforms merged to form Certara. Initially, the company was working with mainly the larger pharmaceutical companies. And to this date, both these founding technologies and founding customers continue to be our anchor. We've grown over the years organically. We'd like to cite a mid-teens organic revenue growth rate as well as through strategic acquisitions. The majority of those acquisitions included technology to develop what we have today are end-to-end platform. So this brings us basically to where we are now. We provide biosimulation software and services as well as technology-driven services across the drug development life cycle. So this now includes regulatory submission support in writing and real-world evidence. We're providing companies, particularly biotechs, with best-of-breed solutions end-to-end. Quick statistics about the company for those not familiar. We have about 1,000 employees, including 335-plus with PhDs, MDs and PharmDs. Our customers are about 1,650-plus biopharmaceutical customers. This includes all of the top 35 by R&D spend. We're a global company. We have a presence in over 30 countries. And I would be remiss as the CFO not to mention we have an attractive financial profile. I mentioned historically mid-teens organic revenue growth and strong free cash flow conversion. I think I'll just finish off with kind of on behalf of the company, we're proud to say that since 2014, our customers who use our software and tech-driven services have received 90% of the novel drug approvals by the FDA.

That's great. It's very helpful and I think sets the stage well for this discussion. I guess maybe if we could talk about just -- you mentioned the range of services that the company provides across the end-to-end process. Could you maybe boil it down and give us some examples of the use cases of biosimulation, maybe from early stage to late stage? Just talk about some of the kind of examples of the use cases. And maybe just where do you kind of add the most value across that process?

Okay. Great question. I think just based on some of the feedback today, I'll add to that question. So before I answer the specific question, I think it's important to point out that not only as it relates to early stage to late stage, biosimulation is relevant across every therapeutic area, including increased -- increasingly tackling complex modalities. So at Certara, we work virtually on every therapeutic area. Oncology comprises the largest part of our work with biopharma companies. Rare disease work continues to increase. New modalities, vaccines, gene therapy, CAR T is also increasing. But I'll get to your question. I just wanted to clarify that because that seems to be a theme today. The way we look at it is in the translational stage, preclinical to early clinical, some of the common uses include optimal first-in-human dose PD end points to guide the dose schedule options. As you move into early clinical, it's again assessing the dosing and dose schedules, but this time with more precision. So as there's more data available, the modeling and the simulations have more accuracy and precision; study formulation options to assess potential BDIs; as well as study cohort or patient-specific factors, inclusion and exclusion criteria, et cetera. Late stage is really where we see the value. As we're progressing and more data becomes available, biosimulation is leveraged for the selection of the pivotal clinical trial dose. It's used for bridging studies, adverse event, potential label recommendations. And I think at its highest form, virtual trials for drug-drug interactions, pediatric or special populations, and more recently, for virtual bioequivalents. So I think based on those examples, you can see, we're participating from end to end in terms of the development process, but the greatest impact is at the late clinical stage. And to that end, overall, the clinical stage comprises the majority of our revenues.

Yes. No, that's super helpful. And I guess just taking a step back, as we think about the market opportunity here, I think you guys talk about the biosimulation TAM today being about $2.4 billion growing at about 15%. Obviously, that's a pretty healthy growth rate for the industry. But in the grand scheme of dollars that are spent on drug development, that seems like a pretty small portion of the overall pie. I guess from your perspective, is there anything that can cause the industry to grow at a more accelerated pace going forward? And if not, maybe if you could talk about some of the constraints that might limit the market opportunity. It'd be helpful to kind of put some more reference points around that.

Sure. Another great question. So the way that we look at that, we've been growing at mid-teens. We see a significant white space opportunity. It's really 3 kind of primary areas that we focus on or themes. The first is innovation in biosimulation. So we're continually pushing the capabilities of technology. And we've talked with press releases about some of our new product releases. One interesting example is a Vaccine Simulator. It's a new product that we developed. This was launched last year in response to COVID-19. So initially, it was developed with regards to that. But if you look at how we're using it today, we're now using this for oncology and RSV. So it's continually developing the technology and extending the use cases. A major driver of future growth, from my perspective, is also global regulatory support. So we know the U.S. FDA is leading this. The EMA and the PMDA are supportive. In the last 24 months and more recently, China's NMPA has released guidances, its first 2 guidances, with regards to biosimulation and how it should be incorporated and those related to drug-drug interactions and second, more general one, for technical guidelines for MIDD. The third factor that's important to us and continue to drive expansion of the TAM is really education and training. So we provide educational content and training to thousands of scientists annually. This includes those in industry regulatory agencies and academia. So these are all future adopters of the MIDD approach. I'd like to point out, I just read this anecdotally, but there's an ICH concept paper coming out later this year, and they kind of cited what the findings were there. It really emphasizes the importance of the education and training aspects. Essentially, the paper noted that it's a lack of common understanding of MIDD between technical and nontechnical experts, a lack of standards and understanding of MIDD terminology and the variable level of integration of these complications into regulatory submissions as the current barriers to increased adoption. So I thought that was an interesting paper coming out later this year. So thanks.

Yes. And so maybe if we could just drill down a little bit further in some of the more specifics around the business. I'd love to maybe just talk about the bookings trajectory here a little bit. I appreciate bookings, it seems like, tend to be pretty lumpy on a quarterly basis. But one thing in particular I want to talk about, if I look at the second half performance last year, it seemed like it was a particularly strong period for the company from a booking standpoint. And so as we think about the bookings cadence going forward, particularly in the second half of this year, in 3Q and 4Q, is it reasonable to think that the company can continue to grow bookings on a year-over-year basis going into the second half of this year? And maybe if you can talk about some of the puts and takes that can influence that, that would be helpful.

Sure. I'll answer those questions, but also just add for those who are new to the story, in terms of bookings, I think people have different definitions or uses of that. From our perspective, it's similar to an ACV metric. So those bookings -- the majority of those bookings convert to revenues in 12 months or less. So the bookings have been in excess of revenues for many quarters, which kind of adds to our forward visibility. I tend to not look at the bookings on a quarterly basis because essentially, the variability quarter to quarter is driven by client behaviors. We have a healthy market environment. The pipeline is strong. Some of these factors are early renewals, late renewals. You mentioned the second half last year, but we cut off Q2 where we saw we had kind of a down bookings quarter, and that was really a function of client behavior. So the pipeline was there, work was undergoing with clients, but new business was stalled as people were hunkering down for COVID. We saw a big pickup in that in the back half of last year, strong Q1. Q2 was a little bit lower than Q1. But back to the client behavior perspective and looking at quarters, we had about $4 million of early renewals in Q1. So that could be an early renewal or late renewal. It has no impact on the revenue recognition. So I guess I'll add, at TTM basis, bookings are 26%. The pipeline remains strong. Regarding the rest of the year, our goals for Q3 and Q4, to grow bookings year-over-year basis. So we're planning on setting up for a strong year in 2022 with a similar level of visibility, consistent with kind of how we performed historically.

Yes. And I guess just thinking about it also for 2022, but also there's probably something that applies from a higher level as well in terms of your algorithm. If you think about trying to achieve a mid-teens revenue growth rate, is there a correlated kind of bookings growth rate that you need to hit by the end of this year to be able to achieve that in the next 12-month basis? It'd be helpful to kind of understand that connection between those 2.

Yes. The answer is yes and no. So I think our business is different from some businesses in that the bookings convert to revenues in 12 months or less. So historically, a book-to-bill of 1.15 to 1.2 resulted in mid-teens revenue growth. We can -- it's more about the bookings growth at the back half of the year would translate into how high my visibility was going into the year. So historically, the 85% visibility -- high-probability visibility based on presold work, our deferred revenue balance and our historical renewal rates. So really, I look towards that metric to gauge the level of visibility that goes into the year. So we could achieve mid-teens growth with or without, but we prefer -- historically, we've had high visibility, and that's what the trend has been.

Got it. Okay. Another topic I want to talk about is just trying to understand a little more in terms of the progression of adoption of your solution set within a particular customer. And maybe a good way to kind of frame that would be, if I look at your customer base now, you're already working with all of the top 50 pharma companies. If you look at your top 30 customers in particular -- I know you call out an average duration of over 10 years. If we think about kind of the length of those relationships that have been in place for a while now, I mean, at this point, what's driving the incremental penetration within those contracts? If you can just help us understand where the opportunity is coming from, that'd be helpful.

Yes. So we've discussed kind of some of the trends earlier that kind of drive that growth in terms of regulatory support and innovation and education with -- that also relates to our top customers. In our top customers, we continue to see growth in the low teens range. It's coming from both increased licenses and increasing number of projects. So driven by those key themes I discussed earlier. Price increases are less of a factor, but they also contribute to the growth.

Okay. And then maybe just getting a little more specific around that, right? If I look at the customer base now, I know that you guys talked about having 260 customers of over $100,000 of ACV. And then you call it 53 customers with over $1 million of ACV. I mean, is there a way to think about -- just as you look at the overall base now, I mean, how many customers can eventually get to that $1 million bucket? It's probably a tough question to answer, but maybe it would help to kind of put the opportunity and the right framework for us.

Yes. Absolutely. That's a big opportunity. We'd like to say that all of our customers could reach that level. It's an interesting question because if you break out those top 53 customers with ACV over $100,000 into, say -- into like various segments, it doesn't mirror the top 50 spending by pharma R&D. So we have about 1/3 of those are biotechs, and some of those are relatively newly formed biotechs, which kind of rapidly came into the cohort. So we see an opportunity to drive that -- increase in that range in both large pharma, to the extent they're not already included, as well as in many biotechs.

Okay. That's helpful. Maybe just shifting gears to talk about just the pandemic a little bit. I know you've talked a lot about the work that your company has done with the vaccine process. It'd be helpful to understand just how much did that type of work benefit the company's performance in fiscal '20 and in fiscal '21 this year? And I guess as we play that forward, could that be a source of headwinds as we transition to more of a post-pandemic environment? Just how do you think about kind of the net effect of the pandemic type of work that you've been doing?

Sure. From a revenue perspective, and this kind of goes to my point earlier that we work on across all sort of therapeutic areas, it was really a shift in the projects that our clients were working on as opposed to an incremental benefit last year. So we worked on about 30 COVID projects. I would say the revenue contribution wasn't a significant portion of our overall revenue last year. I kind of used the example earlier, but there were some innovations that came out of this work, but not just the Vaccine Simulator. We've also developed a COVID database for meta-analysis and kind of analyzing therapeutics and combination therapeutics. These are going to be positive contributions going forward if there are incremental opportunities to be extended kind of beyond COVID to some extent. I have mentioned this a few times. The major -- we have actually saw kind of a headwind from COVID this year, if you will. So in the first half of the year, we've had a strong performance in our regulatory business in terms of kind of booking and signing up new work. But there has been a delay in non-COVID clinical trials. There are some third-party sources that takes about 7-plus months delay in those non-COVID clinical trials. That impacted our first half results to some extent as a headwind, but it's really more of a timing issue, if you will. And we see that kind of loosening up as we go forward. But net-net, we think it's a net positive. It's about accelerating trends and created some new innovations for the company.

And maybe just on that last point you made, stepping back from the actual types of projects that you're working on right now. From a high level, I mean, how has the pandemic influenced the biosimulation industry overall? I mean, has it affected just broadly the thinking around this type of technology and the acceptance of it? Maybe kind of a high-level perspective on that.

My opinion is it's been positive. So certainly, biosimulation could create some efficiencies in the existing processes. To my point earlier about the headwind in the first half, underlying that, we've seen an acceleration in biosimulation, specifically around the more innovative and advanced applications on the PBPK and the QSP and some of the cell and gene therapy work. So it's exciting from my perspective to see those gaining some traction, let's say, at a rate faster than historically.

Okay. That's helpful. Maybe we can shift gears and talk a little bit about the profitability profile here. You mentioned kind of already having a pretty healthy EBITDA margin at this point. As we play this forward and think about the margin trajectory of the business in the future, can you just talk about, a, how we should be thinking about the annual progression in terms of margin expansion, if we should be expecting any? And then secondly, kind of what the sources of operating leverage are that kind of exist within the business right now?

Sure. So we talk about all the exciting growth opportunities. So we intend on capitalizing on the position that we placed ourselves into the market to the extent that we can. Overall, externally, we talked about company goals in the mid-teens and kind of mid-30s EBITDA margins. If you look at the kind of the near-term shift, there's opportunity for, call it, modest expansion over time, assuming we don't take the decision to make incremental investments into one of our growth levers, which is this year's sales and marketing R&D and international expansion. There is operating leverage. It's hard to describe in a short answer but we -- I would say that historically, we've been kind of over benchmark in G&A. And that's been a function of the significant investments we've put into the company's operations and infrastructure to set it up for future growth. So going forward, I'd expect the G&A line to grow at a more modest pace which would -- which is, I think, the main source of the operating leverage going forward.

And maybe just to double-click on a piece of that, right? So if we think about just the talent pool within your organization, you called out the kind of the credentials that a lot of them hold. With the growing -- with the growth of the industry and the acceptance and a lot of the positive tailwinds you've talked about so far, I mean, are you seeing more competition for that type of labor? And does that present a potential source of cost pressure for the business? Would love to hear kind of how you're thinking about the hiring environment right now.

So this is not a new challenge for Certara. So the -- acquiring this type of talent has always been a challenge. It's also been one of our key priorities. So I would say that I hear the discussions about the tight labor market, et cetera, but I would say this is nothing new from our perspective. What we've done is a couple of things. So we've put in place, if you want to call it like operational improvements that would allow us to onboard people with less experience and kind of accelerate their trajectory to become a more senior scientist, Certara University, career laddering, fellowship programs. Going public for us was a major positive from that perspective. It elevated the profile of the company. It also allowed us to be more competitive from a compensation perspective. So I'll say while we still see those challenges, we've got a lot of levers that we've been pulling to kind of maintain the momentum that we need to maintain, and we've done that so far this year.

Okay. Great. Maybe if we can kind of segue then to talking a little bit about the competitive landscape within biosimulation. I guess, number one, I mean, who do you see as your kind of primary competitors in the market? And then kind of, if you can also kind of talk about where you think the company's competitive advantages are, that would be helpful. And we can kind of take that discussion from there.

From our perspective, this is still an early-stage market. So our main competitors is really tackling the white space opportunity. At this stage, it's more compelling than head-to-head competition. There's an abundance of opportunity. That could change over time, but that's not the case now. From a public company perspective, we have a peer group with Schrödinger and Simulations Plus. We're not frequently competing with them for RFPs or on a head-to-head basis. They have slightly different applications for their software. And I would assume the typical large customer uses all 3 for different purposes. So I think our competitive advantage is really our unique position in terms of industry adoption and regulatory acceptance as well as kind of our track record of partnering with our customers, particularly our major customers, 10-plus years.

Maybe just if you could talk in a little more detail. I mean, you mentioned you're potentially using them for different use cases. I mean, is there anything in particular that you'd call out that kind of separates Certara? I don't know if there's anything with respect to the therapeutic areas that you kind of have more of a role in. Just anything else would be helpful if there's anything to offer there.

So obviously, I prefer to have a scientist get into the details here. But the -- Schrödinger is primarily in discovery. So we have less than 10% of our revenues in discovery. I think they've got a portion of their business in discovery and a portion in drug development. So we're not participating in the drug development market. We're focused on making clinical trials and drug development more efficient. Simulations Plus, from my understanding, is more heavily adopted in earlier stages in clinical trials. And we're more in the late stages in the clinical phase. So they're really used for slightly different purposes.

Okay. That's helpful. And then maybe just another one from a higher level, and this is one that I get sometimes from folks is, how do we think about the risk of your end market just in-sourcing more of these functions over time, I guess, building more biosimulation capabilities in-house? I mean, is that something that you think about and as you think about the business? Or just how you kind of talk about that risk or think about that going forward?

Yes. I mean there's -- I mean that's not high on our radar screen at this stage from how we see the market. We see that -- I think we'd like to -- we see that kind of the opposite trend. But one of the benefits of having a company that works across all therapeutic areas with a large customer base is that our scientists have access to the most innovative projects and what's going on in the industry. And that's not -- really not a perspective or a point of view that can be taken from kind of an in-house organization that's working on a specific vertical area. So there's always, in my opinion, going to be a need and a desire to have a partner like Certara to be there to answer those questions.

Okay. That's helpful. Maybe if we could just spend a couple of minutes talking about the progress that the company has made in international regions. And maybe if we can start first with Europe. Just talk about kind of the investments that the company has made there and what you're experiencing. And I guess, in particular, if there's anything to call out with respect to the industry growth opportunity or the regulatory acceptance in that region relative to what you've seen in North America, that would be helpful.

Okay. So in Europe, we've made some investments this year. We've done 2 tuck-in acquisitions regarding rounding out our portfolio of offerings in Europe and also increasing our footprint. So one was based in the U.K. and the other was based in the Netherlands, near Amsterdam or the EMA office moved to from the U.K. We had a -- that was in the regulatory side. So we had strong biosimulation presence there. But to really bring the full offering, we needed teams on the ground to do that. That's been successful for the company. The second area where we've invested over there is when we kind of mapped out our footprint of sales and marketing. We had some gaps in terms of capabilities on the ground in various regions in EMEA. So we filled some key positions over there. We're starting to see some traction. We did see -- I think it's somewhat different than the overall perspective on R&D spending in EMEA, but we did see on a TTM basis the growth rates above 30% in that area. So we're seeing some strong performance there, but in part, that's from bringing a more fulsome solution and having more local resources on the ground to interact with the clients.

Okay. And then maybe kind of a similar question that I pose around Asia. I mean if you could talk about the progress you've seen there. And anything you can call out in terms of the market opportunity or growth rates that you're experiencing in that region?

Yes. We're still early stages in terms of China. So Japan, we've had a strong presence for many years, albeit a smaller group. So step one was bringing on board kind of a new Head of Commercial to run the Asia Pac region. Step two, we opened up an office in China earlier this year. We hired a few consultants, and some more hires to come. So -- that are exciting. So you'll see those at some point. That's put the boots on the ground. To be clear, our move into China, for example, was more of a pull than a push, if you will. So we've got multinational companies who are doing drug development in China. They'd like to use our teams or our resources, our software, but they want to do it with a local presence. So we -- to that regards, an early move and to this point, I'd still call it in a start-up phase. But with that being said, I think in the APAC line and the TTM basis, the growth rate's about 48 -- above 40%. So we're seeing some strong traction that we're coming off small numbers. I'm not saying that's the growth rate overall. It's just a good positive early sign and based on what we've been able to deliver so far.

Okay. Great. I think we're just about coming up on time. So I think maybe it would be good to wrap up on maybe a higher-level question about the industry. It seems like, in general, we've been in a pretty favorable environment over the past few years for our clinical trials in general. And I'd be curious to get your perspective on how you'd characterize the health of the runway going forward relative to what we've been experiencing over the past few years. And what are some of the data points that you look at that give you confidence in that runway, whether it has to do with your R&D spending or funding? Would just love to get your thoughts on how you think about all that.

Sure. So actually, you should give me your thoughts. You're the analyst. But from our perspective, the market outlook remains favorable and healthy. Just as a reminder, about 50% of our revenues come from the top 50 pharma R&D budgets, 50% from all other biotechs and smaller biopharma. So I think both those metrics are relevant, both the funding and the R&D spend. Taking a step back, though, if you take a look at it, we're a small portion of the total R&D spend. Our focus is on improving the efficiency of clinical trials. There's a lot of room for the company to grow in various scenarios in terms of funding or R&D spend. I can note specifically, and I mentioned it earlier, that compared to prior years, the environment has been very robust for biosimulation as I've seen in the revenue growth rates. Regulatory business has delivered strong bookings, and we're looking forward to a strong second half.

Okay, great. Well, listen, I think that's probably a good place for us to wrap up here. We're up on time. Andy, thanks so much for joining us. We really appreciate your time. Thanks to everyone in the audience for joining us as well. To the extent that you have any other questions that we didn't answer here, feel free to send them over to me, and we'll try to get them answered for you. But otherwise, thanks again to everyone, and enjoy the rest of your evening.

Thank you.