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

Good morning, everybody. Hope you're well. I'm Dave Windley with Jefferies Healthcare Equity Research. We're very pleased to have Certara here. If you are -- I'm assuming if you're in the room, you are familiar with Certara, but if you're not, they're a leader in biosimulation in the drug development process. Joining us today are the company's CEO, William Feehery; and CFO, John Gallagher. John has been in the seat for 15...

A little more than a year.

Yes. I was going to say 15 months.

Yes. You are about right there.

Three quarters. So thanks very much for being here.

Really interested to talk about Certara today. And I wanted to start just get you started. Bill, with kind of landscape question, which is biopharma customers have been through -- we've been through the pandemic, and we've been through kind of an underfunded period. We're going through a -- some concern about the economy and then throw on IRA on top in a pricing regime that changes Pharma's long-term outlook. And it seems like if we think not a quarter or a year or even 5 years, but maybe even a 10-year development cycle type time frame that large pharmas probably in that they need to pull some levers to be more efficient and biosimulation and other software and AI probably are among the portfolio of things that they're thinking about levers to pull. So the question to you is, as you're interacting with customers at as higher level as you can, how are they thinking -- how is their appetite for biosimulation and the types of tools that you bring to the market evolving or changing. I'd love to hear.

Yes. Thanks, David. I think that's a great question. And I've been talking about it increasingly this year because -- the way I see this is certainly the IRA has pulled a bunch of profits out of the industry. The pharmaceutical industry, you can pull up whatever statistics you want to look at, it's just not a very efficient development cycle. So if you start at preclinical, you still lose 90% of the drugs along the way. And you even have fairly large late-stage failures that occur at a rate that's quite expensive for the industry. So if you just play it logically, 1 or 2 things is going to happen, either there will be fewer drugs developed or the industry will find ways to be more efficient and I think that we have a pretty good story about how that can happen, and we're starting to get a lot of -- we are starting to get interest about that. So what I talked a lot about people as the science of drug development is around doing clinical trials. And the gold standard is a blinded clinical trial, but the business of developing a drug is about predicting the clinical trial outcome before you spend all the money doing the clinical trial. And that's what biosimulation is about. And that's how Certara I think, fortunately lined up in terms of the technology. So we've been expanding our portfolio of software and experts to do that. And I think the part of our business that's really focused on biosimulation has continued to grow through the kind of the disruptions in the market, and we're seeing pretty good interest as we go forward.

That's excellent. And what I hoped you would say, the -- I guess, what it risks getting into a lot of detail, but you have some biosimulation applications and use cases in what seemed to me to be maybe early clinical that are well-established and well-proven and been used maybe for a long, long time. As I think you described to me since the IPO or even before, you're continuing to try to expand those use cases, and it seems to me, correct me if I'm wrong, the QSP is an extension of biosimulation that cracks open a pretty significant new area of use cases. And so if you could talk about maybe where you see biosimulation application going? Like where are the biggest areas of promise as you think about helping customers on this journey that you just described?

Yes. So thanks. And -- you kind of alluded to it a little bit earlier. We have a lot of products, and if you kind of look at us for the high level, it can seem really confusing. But when you get down to it, biosimulation exists throughout the drug development chain. And we've got slightly different questions being asked at different stages and you kind of think of our products as targeting those kind of decision points where you're making decisions that are going to change the course of that drug's development. So we've got a significant presence in preclinical because there, you're deciding, do I ever want to take this drug into human development? What's my dosing? We're doing things like doing translational medicine where we're trying to either avoid certain animal trials, avoid the use of certain animal models, things like that. We're doing dosing, we're doing decisions around whether you want to take drugs forward based on what you'll know about the populations they'll go into. And so that's one area that we've got. Another area and QSP basically falls right there, and I'll come back to that in a second. Another area is sort of later in clinical, where you're in late-stage trials, and you're saying, well, how do I get the size of these trials lower in the way that the FDA will accept, so a classic example for that for us has been around drug-drug interaction trials and the ability of a lot of our clients to avoid expensive trials because you can satisfy the FDA's requirements and using simulation. So come back to QSP, what we're really doing there is we're expanding what we're doing a preclinical, you're trying to develop a model of how that drug works in the body that's going to -- ideally that model is going to stay with the drug as it develops further. And so it's important for us as a business standpoint to get in early and to be predicting it. And some of the challenges with that business is, this is called quantitative systems pharmacology that's the acronym we use. Some people call it systems biology. There's a bunch of ones. But the idea we're trying to come up with a model of how that drug works in the body, where it's going to go, what it's going to do and will work. And you learn a lot of things, right? So sometimes you learn, "hey, the drug is active, but you can never get enough of it to the site". Other times, you'll find out that it's likely to have a side effect that you might not have found until you got into -- in the trials. All of that is very, very valuable to a drug company as they're going into a decision. And the -- the trick for this is to having enough people and enough capability to produce a model that meets their time line. So we can't say, "hey, give us 3 years, we'll develop a model". They're just going to go develop the drug, and we're going to do trials and we'll be out. So a lot of what we've been doing together is putting together a critical mass of people that we can handle many different therapies and modalities. We're turning that into a software business. And then there's a lot around handling the data flow, so we can easily access the data we need to produce those models fast enough to be acceptable to our customers' time line.

That couldn't have been a better segue into my next question, which is around your acquisition history. So I went back and looked at the last 2 or 3 years Pinnacle 21, Formedix, Vyasa, INDS, Applied Biomass. And I think each of those maybe fits is a plug into the answer that you just gave in one way or another. My question for you is kind of what is the theme that you would stitch through the acquisitions? Or if we were to say go back in time and say Certara 3 or 4 years ago, looked like this. And 2 or 3 years from now, we're trying to get it to look like, it was X, and we're now trying to get it to look like, Y, what is that?

We believe that for biosimulation to really take off, you've really got 3 legs to the stool. So one of them is kind of the cool software that you guys probably know is for we have Simcyp, we have Phoenix. So if you looked at us, that's kind of the cool cutting-edge stuff where we're doing a lot of the interesting science. But that in itself probably would leave us with a fairly limited business because you've got 2 other legs of the stool. The other one is around what I talked about before. It's around the data. So there's massive amounts of data in pharma. It cost a ton of money to find it to standardize the process it, to analyze it, to get it some form that you tracked it back and you can talk to regulators about it. A lot of pharma spending is really in that area. And like I said before, if we're going to do modeling on a time line that's meaningful, we need to be able to participate in that and to help out there. And then the third piece is the experts. So we're not providing generic models. We're providing specific models for you, for your case, for your drug. And so that is always going to require a set of experts that we can bring to bear to help out. So our acquisitions have been targeted in those areas, right? So the one acquisition, I would say, is -- was our biggest one was Pinnacle 21. We did that, thinking 2021. Yes, exactly. Sorry, I get my years there. And so Pinnacle 21 was really designed to give us that leg in the data side. It also did more because we've been trying to become more of a software company over time. And that brought us in a kind of basically a really good software company where we could basically use their organization, their infrastructure and their processes to kind of build that up in Certara. So that kind of gave us also a strategic leg up in being a software company. The other ones have been bolt-ons tied into one of those 3 areas, and we bought software that's been tied to preclinical modeling. We recently -- our 2 recent acquisitions is one was a significant USP business where we're bringing in a lot of the experts in some of the software for quantitative systems pharmacology. We brought in another company that's focused on metadata, which has to do with how you set up your data collection across all of your EDCs and all of your labs to bring in data in a standardized format so we can do this very quickly. So kind of think about it as we don't see ourselves as an acquisition machine. We have done a bunch of acquisitions, but most of them have just been we're in an area where there's a bunch of bolt-ons that start to build out this kind of core offering that we've got.

Yes. I think that's actually very helpful. The categories are helpful for me anyway. Maybe on for a question because you haven't owned them all the same period of time, but what would you point us to as being one of your -- or say, the best performer in this acquisition portfolio? .

Well, you kind of have to adjust for timing. They've all been successful from a financial standpoint. Now being successful financial standpoint has to do with how you integrate them and also what you pay for them. So that's worked out generally, we've -- we're participating in private markets where they're smaller companies maybe not as well known sometimes. In most cases, we worked with the companies for long periods of time. So we know the founders, we know whether they're going to stay with us. We know how we're going to integrate it. So we have some process involved there. You wanted to say what was our most successful one, was certainly Pinnacle 21. It was our largest one, but they have a really good franchise in what they're doing. We bought a software pipeline that's continuing to grow as they add more features, and we're both finding new customers and moving people up in terms of the value chain and what they're paying us. And then like I said, we also got a core software engineering group that kind of helped us supercharge everything else we were doing in Certara as we continue to move our percentage of revenues more and more towards software .

And then on the first quarter, I think the first quarter was the first that you talked about your cloud portal. And so you have all these products, you've been integrating them to the best of your ability, but probably have -- it takes a while for the client to recognize some of that and probably still is an effort to get the client to realize that all of those things map back to Certara. And so how does the portal both enable easier use by your clients. And I also since maybe create more of a kind of a common brand impression to the client.

Yes. So linking all of our software together in a portal, some of it is just very practical, right? So we've got single sign-on for all of our products, which really help the IT departments of our customers love that. From a marketing standpoint, you log on, you see all the products you have, you see all the products you don't have. So that helps our sales group. We can go in and say, okay, well, you guys are using this. This is how much you're using them. You ought to think about these others. So that helps that process. And it gets ride of a whole lot of infrastructure that all these products had to do that. But I think strategically, it has a lot as well because what we're trying to do is we're trying to unite our products into one sort of common framework that a pharma company can use as is moving that drug through development. And in order to do that, we want to have the data basically flowing from one product to the next. So over time, that's what this portal is allowing us to do. So our products are -- this will be the center part where data is coming in, it's being standardized. If you have data, if you've got a product -- if you've got use of our product in your, say, preclinical area, that data is there. And as you move into clinical area, those guys can tap into your data and use it in the products that are appropriate for them. So it gives us a bigger presence. It gives us a much bigger story. And I think for our pharma clients, it sort of sorts out the confusion you have because we have -- we do have this history of selling products to different parts of these very complicated organizations. So letting them see across the whole R&D portfolio is pretty valuable.

Excellent. So to the point on the data fluidity through these products, can we interpret that, that is live now? Like are those capabilities live now? Or are there still parts of the kind of the enablement that goes along with this portal that still need to be...

No, this will migrate over time, but the portals live. We're using it for all of the new releases of our software. So ultimately, I mean, I could reportedly uptake, but the reality is everybody is going to uptake because that's going to be the only way to sign on to our products as we go forward. So that part's live, there will be -- there's going to be a bunch of work over time to basically get all of the data to flow from one product to the next, and then to fill in the holes that we can see as we go forward. We still know a few here and there. And obviously, we've been working on it over time.

And maybe a different version of that question is, I know like Simcyp has been around. It's been versioned annually, but it's been around for a very long time. Is it -- is it cloud ready? Are the products all cloud ready? Or is there a recoding that still has to be done to make them kind of cloud type products?

Yes, great question. So Simcyp, you can buy it -- we can run it on the cloud, on Amazon or you can buy it or you can -- a lot of our clients buy a really big box and run it internally because it's cheaper than paying Amazon. I would say we're kind of indifferent on that standpoint as to how you do it and smaller clients might do one way and larger clients another one. Other products are more data intensive. So if you look at Pinnacle 21, it only has a cloud version. It doesn't really make sense for that to even be based on the desktop, just the way that you're handling data as it moves from group to group around pharma as you're trying to get closer and closer to submission. So I think Simcyp to answer your question, where it runs is less important than where the data at Axon resides, and we're basically building repositories where we can standardize the data and hold it, not necessarily take it from one pharma client. I mean, if it's their data, it's their data, but where they can access it as their products move through the succession of our tools.

Before I leave this and go to maybe some numbers because I'm sure everybody is asking like what the heck is Dave doing here. I want to talk -- AI is a hot topic. The way I formed this question was is our Certara and biosimulation -- are they AI before AI was cool. I mean is there an element of kind of AI that you were already using in your products or asked differently, how does current AI influence where you go in your product road map?

Yes. I mean I could take the bait and say, yes, we are AI all along. But I guess to get into the definition of -- what is AI, right? So what Certara was for many, many years was we were mechanistic modeling, like we looked at the known science, we built up models based on what was written in scientific papers. We carefully documented it, validated it. We got data to prove that the models were accurate and we could go to regulators and show that, hey, this in fact, matches reality and you should use it. Now if we look at what I call AI right now, it's an additional set of capabilities on top of that. So we're interested in AI because it lets us tap into data that we could either couldn't use or couldn't economically use. So there's lots and lots of data in pharma. There's lots of unstructured data that what we do -- what we used to do is unstructured data was we would hire PhDs go read papers and come up with models and document what they did and talk about it. Well, with AI, we can process a lot of that faster. We can start mapping the connections between the science, we can start -- so we can start moving a lot quicker on that standpoint. And I think the other thing we can do with this is we can automate a lot of the workflow that costs a lot of money, both in the operations and what Certara does and what operations and what our clients do. Because a lot of our clients, at the end of the day, drug development is just this massive operation of how do you collect a lot of data on your drug from labs and clinical trials and anything you can think of how do you standardize that? How do you make some sense out of it? How do you make a decision? How do you -- and then ultimately, how you report it out and make an argument to regulators and to payers. So the ability to automate that is a big opportunity for us in terms of just our core business and then helping our clients as well.

Maybe I can throw a John question out here. So -- on guidance, your revenue midpoint is, I believe, around 11% for this year, maybe some carryover acquisition contribution to that, that I'd ask you to quantify. But as you think about that 11% growth. Your management has talked about trailing 12-month bookings growth as being an indicator, which is obviously has been below that kind of around flat to maybe a little below flat. So you have kind of a bridge -- a fairly significant bridge to get from where your bookings growth has been to where you think your revenue growth can be this year, help us with that bridge.

Yes. Sure, David. So thanks for the question. We -- our guidance on the year for revenue is 9% to 13%. So the 11% midpoint, as you mentioned. On an organic basis, we said that, that will be mid-single digits. So that's the fourth quarter acquisitions that we did contributing during the course of this year. When you think about the bookings that you're seeing us achieve relative to the revenue achievement during the year, there's really three things that I'd point out as we move through the year that are a bit different than what we've seen in the past. One is -- so the first of those is the backlog that we carried over from Q4 and into this year. So because of some of the slowness we had seen on the services side, particularly with Tier 2 and Tier 3 customers, on creating bookings, starting projects, continuing projects and finishing projects, we carried more backlog from '23 into '24 than what we've seen historically, and that gives us more opportunity to convert for revenue. So that's point number one. Point number 2 is we're seeing stronger -- we're seeing stronger in-quarter bookings to revenue. And you see that really when you look and sort of one of the key proof points there is in the software results. So we had 19% software revenue growth on the quarter. And that's thanks to the -- many of the new products that we've rolled out during the course of the year, becoming bookings and then also converting to revenue. And then -- the last point that I'd make on why do we believe that we can get there from a revenue guidance perspective, is related to normal seasonality that we see. So at the time that we did guidance, we said that the services business would be more of a first half, second half story that the back half would be larger than the first half. That's not atypical for the business to achieve that and we anticipate that to be the case this year also.

Got it. Any chance you could either give us magnitude dollar value on that backlog carryover element, like how big of a factor is -- I gather you're looking at a backlog relative to forward revenue, and that is a bigger number than it has been in prior years. Can you give us like order of magnitude how much bigger?

There's -- so we haven't broken that out. But I guess what I'd point you to, though, is the Q4 bookings. So we saw -- we saw a strong Q4 from a bookings perspective. And because of the dynamic that has existed with those bookings then being -- one, it's been slower to get the bookings. But then two, once we have the bookings, it's been a slower process to convert to revenue. And that dynamic with a large Q4 bookings quarter carries over into 2024. And as a reminder, too, the other thing I'd add on to that is that services, which is where we've seen some of that softness, a booking typically converts to revenue over a period of 1 to 2 quarters.

Okay. That's helpful. Great. So I think that brings us to time. Thank you to the Certara folks for being here and to everybody in the audience for your attendance.

Thank you Dave.