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

Okay. Great. We'll get started with the post-lunch session. But thank you, everyone, for joining us. I'm Mike Cherny, the health care tech distribution analyst here at Leerink Partners. It's my pleasure to have Certara here. John Gallagher, CFO; Eric Abdo, who's part of the Investor Relations team is here as well. Really appreciate you being here.

And so maybe we can just dive in on the guidance. What I've -- and kind of how that frames the outlook. What I found interesting about your business is the dynamics of what's in your control versus what's out of your control. And so as you think about the growth opportunities you have for 2025 is a kickoff point, how do you feel about your ability to continue to drive better penetration, better new customer wins, obviously, plus upsell versus some of the areas where you're hearing from your customers on pauses and trials, pauses and work that they're doing and maybe compare a little bit the micro versus the macro in terms of where it's impacting your business.

Yes, Mike. Well, first of all, thanks for having us. Much appreciate it. As far as the -- as far as the guidance, I mean, look, we're looking for a solid growth year in 2025. We put out guidance on the top line of $415 million to $425 million of revenue, which represents 8% to 10% growth. When you split the business and you look at software and services, I think that's where some of your questions are going as far as what are some of the drivers. So on the software side, we're looking for 16% to 19% growth, which is aided by Chemaxon, which we closed in Q4. On an organic basis, the software growth is 6% to 8%. And so as we exited Q4 of 2024, we did see, particularly with our Tier 1 as we define that, it's basically the large pharma companies, we saw some dynamics, some continued dynamics of slowness in decision-making to get to bookings. We saw some portfolio prioritization, even some headcount reductions that did impact some of our software business, and we saw that mainly impacting the Phoenix product portfolio. And what that led is to the 6% to 8% growth expectation on an organic basis looking at this year. So if you look at Q4, it's really where we exited though. So you heard a lot of the talk track that we've had around expectations for '25 is a similar sort of end market environment as to what we saw in 2024. And so when we exited 2024, our organic software growth was 7%. So some of that slowness has started to impact us even in Q4. And then on the services side, then where the guidance implied by the numbers that I gave before is 2% to 4% in services. That is a stronger biosim services and then a regulatory business that as you know, we're evaluating the regulatory business. Now it's been under strategic review since the Q3 call. We are assuming a flat to up low single-digit growth in the regulatory business.

And I'm going to come back to the regulatory business. But I want to start, especially on the software side. 6% to 8% is slower versus historical levels on an organic basis, but it's still faster growth than any metric of R&D budgets that we see that we track. And so when you think about that, one of the things about Certara that I've been impressed with is your upsell opportunity, your consistent ability to drive strong net revenue retention in high levels. Has anything changed on that front with your existing customer base? I know you serviced so many. But maybe within large pharma, are you seeing any kind of behavioral changes on how they're thinking about upsells, adding new products, maybe even like the cadence of which products might fall more in demand versus others at any given time? Anything you can fill us in on there?

Yes. The opportunity that we see in biosimulation is enormous in the sense of, yes, we have pretty much all of the large pharma companies are already our customers. But really what we're after is share of wallet at this point and adoption of biosimulation is critical to the growth vector for our software products in that sense. We see opportunity as we've invested in the software platforms to continue the growth that you've seen. So we're -- Certara has a market-leading position in biosimulation and that's because not only are we selling to these large customers, but also we're having usage at the regulator. So the FDA, as an example, is a big user of our software product and that also helps the adoption of biosimulation, as pharma companies know that if they use Certara, the pathway to drug approval is going to be smoother.

And along those lines, are you seeing any differences in terms of what you're leading with? Again, it's hard to find net new customers because to your point, you're fairly ubiquitous across the vast majority of pharma customers. But is Simcyp leading the way that it typically has. You mentioned some of the Phoenix softness, like anything on mix in terms of where the demand lies now, especially as your pharma companies hopefully are in the later stages, but continue to go through various stages of portfolio optimization?

Yes. Good question. So we're not seeing an impact in certain areas. So we did highlight that Phoenix, we saw some softness in renewals related to some of the dynamics we talked about. Alternatively, Simcyp growing very strong. So we have not seen a departure from the growth, the historical growth rates that we've seen in Simcyp, which is a great indication of the continued adoption and usage of a core biosimulation software product. And then Pinnacle also is continuing. So Pinnacle 21, when you think about data standardization, data formatting for preparation for an FDA submission, then Pinnacle is a critical product for that, that has a very, very high renewal rate, and we've seen continued growth from Pinnacle. So although because of the end market environment, we have seen some slower decision-making and some softness in the Phoenix product. We're seeing that certainly partially offset by the strong performance in Simcyp and Pinnacle.

And you mentioned the dynamics of the FDA as a customer base, too. Are you hearing anything so far? And again, I know it's very early in the administration, but with public commentary around pullbacks on various different NIH grants. Obviously, we don't have a permanent FDA head in place yet. It seems like we're getting towards one. Are you seeing any behavioral changes there one way or the other? And maybe to ask it a different way, how did you factor if you did the change in administration into your guidance?

Right. Yes. So we have not seen any impact yet related to any changes in the FDA. We remain very confident, though, that we have a high number of users in the FDA of our software products. And that's -- as I mentioned earlier, that's one of the key reasons why pharma companies choose us. And we continue to work with the FDA, help educate them on the software. We host webinars to further the development of the use of the software, and we haven't seen any impact on that. Now it's still early, and we don't know what will happen -- to your point, there's uncertainty around what will happen with the FDA. But we're very confident, though, that in this environment, an environment that's focused on efficiency that the continued use of biosimulation software and specifically Certara's biosimulation technology will continue to be used at the FDA.

And maybe I take a step back. I mean biosimulation now has been ingrained in the market for a number of years. You've had a high degree of success with the number of molecules that have gotten the market more efficiently by working with Certara, with utilizing Simcyp, utilizing other entities. How do -- what do companies that don't use biosimulation do to either replicate the outcomes? Or I guess, how do you compare and contrast the design of a trial that is utilizing Certara or utilizing one of your peer's versus one that's not? And why -- like why would you not use it at this point in time for a trial?

That's a good question, Mike. So I think that -- I mean the whole value proposition around what Certara offers in both software and in services is efficiency in the drug development process and ultimately, approval. And so we not only reduce the amount of money that it takes to develop a drug, but also the amount of time. So we think that if part of that question is, well, why aren't we seeing stronger adoption? Some of what we're doing at Certara to address that is you saw investment in the commercial team over the last year. You saw that show up in the sales and marketing expense line during 2024. And what we're seeking to do is really elevate the call point so that we're elevating this value proposition to the key decision leaders within large pharma on how they're deploying their capital because we think that value proposition will resonate. Obviously, it's resonated well at the levels that we're already operating at in the pharma customers, but we think that will resonate even more so to the key capital allocators and decision-makers around how drug companies are deploying their dollars.

We've touched a bit about some of the challenged market conditions, but your bookings outperformed in the fourth quarter, I think, versus what you were expecting. You saw nice growth. Maybe can you give a little sense of some of the components of that? And is there anything that you've seen -- it's early, but just fourth quarter a couple of weeks ago, but any other trends to call out as you're thinking about the kickoff point to the year?

Yes. So we did. We had a very solid Q4. To your point, it was above expectations. A couple of things to call out there that were highlights. We -- normally, we do expect to have a strong Q4 in bookings. And so we were pleased that, that seasonality played out as we would historically expect that it would, even though we had set the expectations a bit lower as far as what we thought any kind of budget flush dynamic would be. And we think that was appropriate, and it kind of came in line with expectations there. One area to highlight that did play out above our expectations was in the regulatory business. So for the first time during 2024 -- during the quarters of 2024 in Q4, the regulatory business returned to growth year-on-year, not only in bookings, but also in revenue. So that was a nice turnaround as far as the business achievement. And we -- I think you know, on a year-on-year basis, the bookings for regulatory were down. So exiting the year on a high note for the reg business was a good spot to be. That was further supported by biosim services. And then software had really got strong performance, which was highlighted by Chemaxon, which put up a very strong Q4. Some of that was on seasonality, and some of it was due to overperformance in the business.

And so -- again, I'm going to push off regulatory again for a bit, but let's stick with Chemaxon. Obviously, not your first deal, but your most recent. I think it's been about 5 months since the deal closed. Maybe give us some learnings you've had so far. You talked about the strong fourth quarter. What's your sales force, what's your commercial team excited about relative to having Chemaxon now in the toolkit?

Yes. Yes. Thank you. So we announced Chemaxon back in July of last year. We closed the deal in October. And we're very excited to add discovery to the product offerings across Certara's software portfolio at this point. So Chemaxon is cheminformatics software that has tools across the design, make, test, analyze, which is sort of the core functions in discovery. And although we did have a D360 product in Discovery already, Chemaxon adds a lot of depth and customer breadth and combining those 2 products together, it's one of the key synergies that our commercial team is very excited about. Moving into the future, then we also think combining Chemaxon's cheminformatics software, not only with D360 as a combined offering, which is -- that's what we're doing right now, but also then combining it with Simcyp into the future is another good synergy opportunity, and that's what the commercial team is really excited about. I mean one of the opportunities we have with Chemaxon is, although they have good customer penetration, at Certara, we have more than 2,400 customers across all 3 of the customer tiers. So there's a big opportunity for us to introduce Chemaxon to many of the customers that are already in the Certara portfolio, and that also is another nice synergy for us.

And is the idea behind Chemaxon more than it's a commercial play, i.e., you have a product that works, let's put it through our channel versus a product development play in the sense that -- at least from what I've heard so far, there's no intentions to majorly drive new adoption -- new -- sorry, new innovation changes at Chemaxon. It's more plug and play the product, it works in our portfolio and go from there. How should we think maybe if there is one detail -- the product road map for Chemaxon now that's inside Certara?

Yes. Yes. I mean we've had the company for one quarter now, and we've been very pleased with the performance. So I think every software platform that we have will require some investment and some development and functionality and features and Chemaxon will be no different there. But I don't disagree with your point that I think at this stage, what we're very focused on is how do we bring Chemaxon into the software portfolio for Certara. How do we find additional synergies and sales opportunities associated with it. And so I think that's the right takeaway.

Yes. So now I'll get back to regulatory. You talked about having a strong fourth quarter, which we saw. And yet the business is still undergoing a strategic review. I know it's -- I'm not asking for an update because I heard loud and clear, it's we'll hear when we hear one. But remind us why now is the right time to go through that review? And what is it about the business that you think may be better outside of Certara going forward?

Yes. So you're right, Mike. We are continuing the evaluation of the reg business. We haven't drawn a conclusion on that as of yet. We will update when we do have that conclusion. But I think -- but as it relates to -- what does that mean and why are we thinking about this at this moment in time? So it was in the Q3 call that we said that we thought it was an appropriate time to evaluate the appropriateness of reg in the portfolio. So we're continuing that process now. I think the answer to your question, though, comes back to where is the focus of the company. So as we've grown over the last several years, there's been an increased focus: one, on software; and 2, on biosimulation. And so as we continue to focus on software and specifically focus on biosimulation and that's part of the evaluation that we have as to what is the fit for the reg business into the future.

When you think about that future of biosimulation, we constantly hear in the market about the AI hype reality cycle and companies that claim to have AI and it's just automation, wherever maybe. You've talked about AI in the past, and you have both AI functionality now and the ability to develop more. How should we think about use cases now for AI within your product portfolio?

Yes. So the most immediate use case for AI in the product portfolio today is the CoAuthor product, which we launched last year. So we did an acquisition back in 2022. We acquired Vyasa and with it came AI technology, which we've been working into and investing into the portfolio now over the course of the last couple of years. So that culminated with the first step in AI product introduction being the CoAuthor product for reg writing. Now we think that technology can be expanded and there's AI use cases also in biosimulation modeling as well as for efficiency for our services team as they're working and can take on higher volumes, thanks to the efficiencies of using AI. So those are a couple of the -- those are a couple of the areas: one, CoAuthor that we have presently in the market; but then two, where do we focus AI into the future.

And what does the investment look like now on that front? Like how much do you think about, call it, improvements in the core platform versus AI advancements, which obviously may take a different type of capital requirement?

Well, there's 3 key areas of R&D investment as we're -- because we called out, we said we guided the adjusted EBITDA margin to 30% to 32%. And some of that is a product of the investment that we want to make in R&D during the course of this year. So there's 3 areas that we're investing in. AI is, of course, one of them, and we just talked through some of the reasons why we think that's an important investment. But the other 2 areas where we're investing is in the products themselves. So think Simcyp, think Phoenix, think Pinnacle and driving additional functionality. When it comes to Simcyp, how can we make it more accessible to a larger audience. In Phoenix, we're continuing to drive the Phoenix-hosted adoption. And so developing the software and the features around that is a core focus of ours. And then in Pinnacle, it's around data standardization and formatting. So we want to make sure that the strong software growth that we've experienced historically continues and keeping up the functionality in those software products is a key component of that. And then the third area of investment is unifying the platforms. And so unifying the tech backbone of all of the 4 platforms that I just described. It's really -- now we have Chemaxon in addition to Simcyp, Phoenix and Pinnacle that we've had historically, and that's sort of the third area of R&D investment that we're focused on during 2025.

And along those lines from a platform unification perspective, what does a core customer, a top-tier customer look like in terms of how they utilize the different platforms and how they contract with you on utilizing the different platforms?

Yes. Most of our customers use both software and services and many of our customers can utilize more than one software product. So that's part of the thought process behind introducing Certara Cloud, which was -- we've talked a bit about that previously on a single-sign-on type portal that really introduces customers to not only the software applications that they're currently using, but also the breadth of software offerings that we have. So it's not uncommon for example, for -- especially for a larger tier customer to utilize Simcyp, for example, in biosimulation processes. They may also use Phoenix. And then when it comes to submission to the FDA, we would use Pinnacle for some of the data preparation for submission to the FDA in addition to using biosimulation services along the way. And now that we offer CoAuthor too, that could even utilize CoAuthor for some of the regulatory writing aspects.

And along those lines, in particular maybe focusing on biosimulation services within your service portfolio. When your Investor Relations reps told me early on, it's like, don't even think about trying to run the software because you and I can't, which I find to be a great joke, but it also, I think, speaks to the value-add of biosimulation services. It's for organizations where they don't have the PhDs, don't have the computer science engineers that you can do a lot of the work for them. And so along those lines, how do you think about the threshold at times of organizations that want to have software implementations, and especially the cloud entity of biosimulation software versus the organizations where you providing biosimulation services is a better ROI for them?

Yes. We -- there's always space for no matter what the customers' needs are as it relates to biosim. We have the opportunity to be able to meet those in the sense of some -- to your point, Mike, some customers may have -- if you're a large biopharma customer, you may have some in-house capabilities and you're more focused on utilizing the software. In other instances, if a biotech company isn't at a spot in their development cycle, where they're ready to use the software, they may be using the services. And then we have tons of companies that -- or customers rather that are in between and utilizing both the software and the services. So we've been -- the solution that we offer is highly customized as far as what the needs of the specific customer are.

And along those lines, you have a strong scientific staff. I forget the latest number of PhDs, but I know a lot...

Yes, it's 400-plus PhD scientists. The largest -- we have the largest group of subject matter experts outside of what you'd find inside of a large pharma company.

Does staffing at any point create an issue, especially as you expand your customer base? How do you feel about the hiring process and the ability to make sure you're recruiting the right people to service customer needs?

We have -- so we're always looking for strong scientists and subject matter experts to join the Certara team. We have not had issues in attracting and retaining that kind of talent. And in fact, our attrition rates are very low. So yes, finding the subject matter experts and attracting them to the Certara team is an important priority, but it's one that we do on a regular year-over-year type basis and haven't experienced any issues there.

Perfect. Maybe I mentioned how Chemaxon is still very much an integration process. But you've been a company that's been very opportunistic to a healthy degree on M&A. How do you think about the current pipeline for M&A, especially with the macro-oriented concerns. Are you seeing entities that would fit within your portfolio because they're running into demand challenges, they're having their own business issues? How should we think about the push and pull and also the appetite for the management team to pursue further M&A on a, call it, medium-term basis?

Yes. So the -- we have low leverage. The balance sheet is obviously very healthy. And so the capacity to be able to take on M&A is certainly there. As you've noted and what we're focused -- we're very focused on. We've done several acquisitions over the last year or so, and we're very focused on the integration and the synergy opportunities that we have, especially associated with our most recent acquisition in Chemaxon. So I would say that we're at a point where we're focused on the integration and delivering the value that we could see in the synergies there. But with that being said, we would be opportunistic, especially we've been very clear that we're focused on software as a strategy within M&A. So if there are opportunities within the software area that would make sense for us, then we are in a position to be able to capitalize on those. But on balance, though, we are focused on the integration of the great companies that we brought in recently.

And you mentioned your -- as part of your guidance, 32% EBITDA margins for the year, I mean, very healthy level of profit. Tons of companies I would love to see a first number with having a second number for EBITDA margins. But you're also still investing. You talked about the commercial investments last year. As you think about that balance now: a, do you think the commercial investments are at a point now where they're run rated or are there still more to be made? And then, b, are there areas where either you have excess investments you want to continue to make or areas where you feel like you can pull back just based on current market demand and other factors?

Yes. Thank you. So I mentioned earlier and you just mentioned it here, too, that the sales and marketing investment that you saw in the 2024 numbers was our investment in all the commercial capabilities that I discussed earlier. And so we believe that ramp is behind us now. And the expectation for sales and marketing expense growth should be more in line with the organic sales growth. So that investment, we've built up. It doesn't mean it doesn't grow, but it just grows more at the rate of organic sales growth. Alternatively, though, the R&D line is where we're focused on making the incremental investments that I mentioned before. So into the existing product platforms, into the unification of the tech backbone and into AI are the key areas that we're focused on.

And maybe to wrap with a big picture question. We all understand the market conditions now, but you've talked in the past about moving back into the double digits on potential for revenue growth. Like how do you think about what needs to happen, whether it's market-wise, product development-wise, to reaccelerate towards your more historical or closer to more historical top line growth levels?

Yes. We're very confident that we can get back to those levels, and it's for 2 reasons, really, right? One is everything that we talked about here on the commercial investment that we made, the R&D investment that we made, both of which are going to catalyze growth and increase our ability to execute with the current customers and new customers that we bring on. And so that piece is highly within our control. And part of the reason that you saw good bookings in Q4 was a result of strong execution by our newly grown commercial team. That's one aspect that's going to help us get back to the double-digit growth. Of course, the R&D investment in the product and the growth that, that will catalyze into the future is going to help us, too. And then the last component is we need some help from the end markets, right? We have seen weakness in Tier 1 customers for a prolonged period of time. We've also seen volatility in biotechs or Tier 3 customers for a prolonged period of time. So the combination of payoff and the investments we've made in commercial and R&D are -- those are within our control, that's what we're driving for growth now and into the future. And then if you combine that with the fact that the adoption for biosimulation still has a very long runway to go. And as the end markets resolve, which hopefully at some point, we don't have it baked into our guidance for 2025, but at some point, they will resolve. And I think at that point, you'll see Certara growing in the mid-teens.

Perfect. We'll be on a lookout for it. But John, thank you so much for being here. Really appreciate the time and the update on the story.

Thanks for having me. Appreciate it.