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

Welcome to the 2022 Jefferies Healthcare Conference. My name is Steven Couche. I'm filling in for Dave Windley, who is currently in quarantine trying to get a negative PCR test, so he can join us. I'm happy to be joined by the Certara team, William Feehery, CEO; and Andy Schemick, CFO. Thank you for being here.

So I guess we will jump right into it. Certara went public in December 2020. So a lot of questions we still get are around the industry in understanding biosimulation, which is roughly 2/3, maybe 70% of your business and then the additional 30-or-so percent is direct services with some market access. If we think about the overall clinical development industry being 6%, 7%, 8%, but biosim being mid-teens. Maybe at the industry level, can you help us bridge that growth gap.

Yes. So biosimulation is growing faster than the industry because it's relatively small and it's kind of been taking over in terms of mind share. So it's kind of natural that we grow faster than the industry. We started the -- we did the start. The company was started about 20 years ago, and so it's been building up slowly. I think a few years ago, we kind of passed the point at which we've got critical mass. If you look at our customer base, we've got pretty much all of the big pharma companies and another 1,500 companies after that. So certainly, you can see the adoption is there. But if you look at each of our customers, there's still a long way to go in terms of the full use of biosimulation. So I believe that we can continue to grow for some time.

Okay. And is there any way you can attribute some amount to pricing and then maybe look at use cases where biosim is primarily used today, and then where the use cases are expanding, whether by phase or by therapeutic area, however you look at it?

Yes. I think we say that we -- our pricing we get historically said health care CPI, which historically was in that 3% to 5% range. I don't know what the pace is today. So that's the component of the mid-teens growth from pricing. Do you want to take the use cases expanding?

Yes. So the long-term potential has been to expand use cases. The way that we generally operate this as we seek to produce a mathematical model of the known biology for a specific therapy or organ or target in the human body. And we generally have inputs to that, that mirror the differences in human population that you would incur -- you would encounter in a clinical trial. So there's a lot of places we can take that. And so generally, we've gone where our customers have pulled us, which isn't everywhere in the market. We started with Simcyp, which kind of is a -- which is kind of the basic product we have, which is a model of the entire human body and what's called the physiologically-based pharmacokinetics of the drug. But then more recently, we expanded the other areas like immunogenicity. We have a product out that we announced last quarter. We've worked on immuno-oncology. We have a vaccine simulator, which fortuitously we produced in the middle of the pandemic and had some use there. And as we find other areas in which we see a significant concentration of the industry working on specific therapeutic areas, it's our intention to keep growing more and more of those out.

And when you say customers are pulling you in certain areas, what is the impetus for them wanting to pull you there? Is it that they're having some issues either in nonclinical or clinical or what are the pain points that underpin the reasons why they're pulling you in?

Well, for the new therapeutic areas, it's generally somebody who's seeking to understand what's going on, for example, in our central nervous system area. There's a lot of companies that are still interested in what's really going on the -- in -- for example on Alzheimer's. So there's a model of the brain and of the specific mechanism of action of that disease. And so we'll have that as far as kind of our new areas. In terms of how a customer actually might get started with us, a lot of times it's a lot more mundane than that. There a lot of have has to do with the fact that we have existing models where the FDA might ask a question or they learn that they might be able to avoid some degree of clinical -- human clinical trials by working with the software. And so they find our way to that -- in that way.

Okay. Thinking about regulatory guidance, that's something you've named in the past as sort of being a driver of biosimulation. Can you give us some sense of how they are facilitating greater use of biosim, the one that's come up recent is Project Optimus as an example.

Yes. So the -- we were just looking at this earlier. So numbers -- but the number of regulatory guidance from the FDA...

'17 to '18 guidance is in the last 5 years versus '13 to '14 and the previous '20.

They relate to biosimulation in particular. So a lot of this has been driven -- I mean nothing really happens in this industry, unless the FDA is okay with it. And the FDA has never gone require anybody to use biosimulation. But at the same time, they use -- they are known to use the software to ask questions about submissions. And they've been known to accept outputs of biosimulation in drug labels. In fact, there's how many we have over 100 drug labels in which biosimulation is specifically referenced. So that's a significant growth. Then there's other things like Project Optimus that you referred to. That's a more recent addition where the FDA is specifically looking at oncology drugs and rather than -- and looking at how people come up with a recommended dosing. So rather than what done in the past and what you look generally at what's the dose which you'll cause a significant safety issue. And then you back down a little bit, they're acquiring companies to basically look at what the optimal dose considering all the safety and efficacy information that's supplied. That's changing the way oncology companies -- or the companies developing oncology drugs are thinking about their dosing, which is leading to opportunities for Certara to participate in that. And that's one of the things we talk about a lot now.

For regulatory services, you expect that to grow low double digits roughly. One theme in clinical development is really the proliferation of endpoints and data in these trials. Can you speak to the degree for which that creates some sort of ASP uplift or greater volume or drives outsourcing for your services?

Yes. It's an interesting question. I think over time, there is a trend to greater regulatory complexity due to, as you're saying, the large amount of data and greater endpoints. For us, kind of in the time frame like a year time frame, that tends to be kind of overwhelmed by the shorter-term ups and downs in the market. The big thing that's been affecting us over the last couple of years has been the lengthening of time to complete clinical trials so that regulatory submission can be made. And so that's kind of -- the fact you're talking about is definitely -- is there, but over the last 2 years, it's probably been overwhelmed or maybe counterbalanced by the fact that there's a whole lot of trials have never finished, and therefore, those regulatory -- that regulatory work is delayed that kind of created kind of the opposite. Over time, data will get out of trials that will start to reverse and we'll get back to where we were pre-pandemic.

So when you say that there were some number of trials that just never finished. Was that due to some issue clinically?

Yes. I mean it's generally due to the -- been due to -- as we understand it, it's generally due to pandemic-related issues with access to clinics and things like that. So they'll get 80% done, but to actually start -- to actually do the regulatory filing, you got to get all the way down. So we'll often book the work and we have a standard amount of time we expected in which it would normally start where you saw lengthening of those times during the pandemic. At some point, we will see that come back with but it's a little bit harder to predict when that would be.

Okay. So that last 20% to get it over the finish line to lock the database. And is that primarily the FDA just not having enough manpower or enough throughput to be able to look at these trials or is it something with the process of it?

No, it's way before the FDA. It's more getting the -- it's basically getting the data lock before you start the regulatory filing. So they have most of the data, but not all of the data so the trial waits until -- till that finally 20% or something comes in.

Based on the statistics we look at, they categorize as delayed enrollments as the primary driver of that.

Okay. And I think that's sort of the issue you saw the last -- or near the end of last year and a little bit in the first quarter around the regulatory services business, that delay. I mean, to what extent -- it sounds like it might be not much. But to what extent do you have the ability maybe over the medium to long term to smooth that out with devices of your own versus, is it just sort of the way it's going to be for a little while until things correct?

We're always going to have some percentage of our business impacted either by clinical trial progress for at the end of the -- with later on as adverse regulatory event. What we -- we have less projects on the regulatory side than we do on the biosim side, we'll see more stable growth. I think as we grow in the number of projects that we take on in the regulatory space is -- at a similar level to where we are today on the biosim, they be more material fluctuations at that point.

Okay. Maybe digging a little bit more into your customer breakdown over 2,000 customers, you most recently disclosed. That would be an average customer spend around $200,000 a year. By our math, you likely have over 1,000 customers that are probably under $100,000 a year or so. If we think about your largest customer, should we think that about the top 50 pharma as sort of the only clients that could potentially spend over $1 million a year? Or is there a mid-level segment that could do that as well.

You could start.

In our current mix of clients over -- would spend over $1 million, about 55% is the top 5 pharma. There's about a 1/3 that's biotech and then there's other -- another category in there as well. So we think that when looking at even the biotech it's not always the largest biotech that can achieve that level. We have an opportunity with many clients to pull them up.

Okay. And I'm interested how does a smaller customer spend significantly more than a larger customer essentially? And maybe talk about that customer journey from a smaller customer to a larger customer, maybe something like how many molecules they have, number of scientists, what are sort of the key underlying factors for how much they could potentially spend with you?

Sure. I can start. On the customer journey side, we're talking about early stage company in early stage development relative to our later stage work, it's a smaller ASP. So we'll start with either a small consulting engagement that we call a gap analysis or a strategic analysis on the biosim services side or with the Phoenix license, where the customer grows is to the extent that they have some success in their development program and as they move later on into the development process, our ASPs go up and where we can have an impact increases so we're not just talking about strategic advice or some PK/PD modeling, we're attaching some more advanced modeling with PBPK drug interactions, QSP. And then that's also where you're going to see some of the lift from the regulatory business attaching too.

Yes, I can add to it. So we're both a software and a services company. The software tends to go by the number of scientists that are in a company. So you'll see the bigger companies are bigger software customers. The services tends to go by a specific drug project, which is why -- that's why some of these biotechs can get it as they have a project get into late-stage clinical where they're convinced that biosimulation will help them, and we've got the need...

Okay. And for maybe that group of smaller customers, that 1,000 or so that are less than 100,000, maybe they don't get to late-stage clinical. Can you profile that customer a little bit? I mean, is it normally an inbound sales where they need something that only Certara has and that's how the sales motion goes or what does the average one of those small customers look like?

Well, there's obviously a big variation in there, but I guess if we want to kind of generalize a small biotech that comes to us usually starts out with either a license to Phoenix software, which is pretty widespread in the industry or they'll start out with like a development strategy project, which is generally not a very high price it, but we want to stay relevant. And ideally, if they're successful, it gives us an opportunity to grow with them. That's how someone will start with us. As they get bigger, as they get more scientists then they can buy some more software. In general, the biotechs buy less software because that's the way they're set up. But it really depends on what stage that drug gets into and that's important because even if that biotech becomes bought by a -- becomes acquired by a pharma company that -- often it's pretty typical that will stay a viable project and we'll still get significant revenues as I get -- as they get bigger and bigger.

Okay. And then do you view there to be an opportunity to grow faster in the SMID biotech? I know relative to the industry, you might be a little more tilted large pharma. Is there an opportunity maybe a little bit lower friction sales motion? Is there anything there to become more in line with the overall industry?

Yes. So a few years ago, we were a lot smaller than we were. And I'd say the bulk of Certara was really with the large pharma. So we made a specific effort to reach out to biotechs and that requires to do 2 things. One was to grow our services capability because a lot of them, they want to buy the answer, not the software, the way I talk about it. And it also requires us to grow our sales and marketing. There's just a lot more of them out there. Now there's a biotech funding dry up and everybody asks us this question, well, [indiscernible] be exposed? And the answer is no. I mean we don't drive a lot of our revenues from those really early stage biotechs, but it is important in the long run because we want to make sure that any successful drug that's going to become -- that's going to need significant biosimulation services, especially in the clinical phase that we're there for them ideally making sure that they're aware of us and they're aware of the value that we can create early on. So over time, I think it will grow. I think we're -- we have nearly 2,000 customers. So there's always interesting new biotechs coming up, and I expect that we'll always have a lot of new logos showing up. But really, the bulk of the money is always going to come with what is a much smaller subset that's getting into clinicals.

And we've had a few calls along the same lines of the biotech funding. We spoke with a few BCs and they're saying that they're trying to get their portfolio companies more approval, maybe push back a little bit on price, acknowledging that they are relatively small dollar tickets, have you seen any sort of push back, whether that be the initial engagement with some of these small biotechs or even as they move through to later-stage clinical?

Well, the countervailing issue there is that the labor situation in pharma, for really experienced people is pretty tight. So I think that's -- I certainly respect what they're saying around trying to get a better deal as funding gets tighter, but there's still a tremendous amount of work out there. The pharma industry is huge and I think it's generally challenging to enforce that.

Next, maybe we can move to margins. So in '22, you're expecting 10 points of margin expansion, which is slightly below the 30 to 50 basis points that you've messaged in the past. A lot of that is driven by, I think, $2 million to $3 million in incremental R&D. Can share with us where that higher R&D spend is going? Should we think of that as the new baseline? Maybe can we split it out between sort of growth and maintenance of infrastructure. Just try to give us more color.

Sure. So we're targeting in our plan this year to have R&D run at about 9% of revenue and looking out to next year, I expect that to be at a similar level and then decline about 200 basis points over the next 3 years at 7% of revenues. The $25 million R&D is a piece of the puzzle. We also have about $12 million of software development CapEx. We put that all in aggregate about 35% to 40% for new products. 10% is for infrastructure and the remainder is science for maintenance of our existing products. .

Okay. And when -- or at least we hear of more investment being put into like QSP platforms. So when there is an opportunity or I think maybe how you view the QSP platform might change this answer, but how do you think about investing when there is maybe a meaningful market opportunity over the next few years.

Well, QSP is still kind of -- that's the cutting-edge side of this right? Still -- it is a significant market. We have a growing business there, but it's going to take -- it's going to develop for years. And it is going to be -- and it's going to split into many things. QSP at the end of the day, it's kind of a very long name for advanced modeling. And already, what we've seen is our QSP effort have split into groups that are working on, for example, gene therapy where we're looking at how to development model of the viral vector that a lot of companies are using that we can reuse ideally across multiple clients. We worked on models of the immune system, which have been branched into products looking at oncology and then products looking at just generally all biologics, for example. So I think QSP overtime is going to split into more specialized segments. And then within them, there will be an increasing software component, but we're still kind of at the early stages of that. So it's going to go for a while. I'd say, generally, we're -- I'm not sure we're going to reveal exactly how much of our R&D, but that's a significant piece of our R&D investment going forward to development.

Okay. And -- so it sounds like QSP might be, well, there's other -- there's components of it. But are there specific areas where you believe that there's maybe a near-term payoff for those R&D dollars that you could share?

Well, I think the 2 that we're really excited about lately has been in immunogenicity. So the ability to predict immune response of a specific biological molecule across a population of people is pretty useful in a large number of drugs. We have a product there. We have a number of customers. And recently, we announced that the FDA took the license, which we think is significant because if they start using it to ask questions then that will drive interest -- even more interest that. So that's what we're interested in. The second one I mentioned is in the cell and gene therapy area. We believe that time, a lot of them are going to require models because a lot of them are focused on rare diseases, and they have these characteristics where in many cases, you can only dose the patient wants in their lifetime, so getting dose right per patient, they will require a model that is accepted by the regulators and by the industry. So that's another area that excited about maybe in the near term. So...

And it would be fair to say that in cell and gene therapy, the usage of models now is close to 0 just because they don't exist in the...

There are no -- we're working with several companies on this. I mean it's cell and gene therapy, most of the drugs are in development, right? There's been very few approved so far. So it's still kind of something to come in terms of approved drug.

Great. Well, I think we're coming up on time. So thank you, everybody, for joining us. Thanks, Bill. Thanks Andy.

Appreciate it. Thank you.