Okay. Hi, everyone. Thanks for making it to the end. We saved the best for last. I'm Joe Vruwink, the Vertical Software Analyst at Baird. Our next presentation is from Certara. Certara is a company that is really changing and transforming the way drugs are developed, and they do that through leadership in biosimulation software, and then a related set of service offerings. Joining us from the company today is William Feehery. He is CEO. And John Gallagher, CFO. This is gonna be a fireside chat format. If anyone in the audience has questions, you can raise your hand or email session2@rwbaird.com, and I'll get them on the tablet.
But maybe, just to begin, we can get a brief overview of Certara and kind of your, how you think about the investment case.
Yeah. Thanks a lot, Joe. So we have our standard disclaimer, and they asked me to just use one chart to introduce the company to anybody who may not know us. Certara is a biosimulation company. We have an unusual history. We have been around in some form or another for over 20 years, and we've grown to over 1,200 employees. Our employee base is, given our product base is very heavily scientific, so we have lots and lots of PhDs in the company. And it's been grown over the years with by putting together a lot of acquisitions. The core of the company, as I said, is biosimulation, and the idea is that we develop mathematical models of biological processes.
They're used to simulate how drugs work in the human body and how they work across populations of humans, like you'd find in a clinical trial or like you'd find when a drug reaches the market. We have multiple products, we have multiple services, but generally, the idea is we want to enable biosimulation for the simple reason that about half of drug spending is in human clinical trials. By using biosimulation, you can reduce the amount of spending on human clinical trials, either by reducing the trials, by ending earlier because you know the drug won't work, or by redesigning the trials. Since there's so much money that goes into human clinical trials, it's not hard to understand how small changes can justify pretty big spending on software and services to make use of scientific information.
So we have basically software that works in biosimulation. We also help our clients with regulatory and compliance and to some extent with market access. And then you know, we report our segments in both software and services, but we have an integrated company where you know, we have fairly complex software. Some companies like to buy our software but also like us to extend it or would like to talk to the experts. Other companies, particularly on the smaller side, don't have the internal groups of experts to use the software, and so we do, and we can provide biosimulation on a project basis. So the net result of this is we have overall a $13 billion TAM.
A lot of that TAM is in the regulatory side, so maybe a more accurate version would be that we've about a $3.3 billion TAM in biosimulation. We have a very extensive customer base. There's about 2,300 customers across 70 countries. Our 1,400 or 1,300, whatever it is, employees are in 30 of those countries, so we're a global company. It's quite an interesting place to be. Because we've been around for a while, we have pretty long tenure with our large customers, about 10 years for our top 30 customers. Most companies in pharma do some business of some kind with us. And then, you know, our largest customers have obviously grown, so every year we report statistics.
So there's about 370 right now with ACV of over $100,000 and then 57 of at least $1 million, some of them quite a bit larger than $1 million. And those numbers have been growing every year since we've been public. To just kind of give you a little bit of a quick view of financials, I'll just turn it over to our CFO, who can maybe just give a quick introduction on that. John?
Yeah. Thank you, Bill. Yeah, so the financial profile of Certara, you can see the revenue that we did at Q2 on here was $90 million, representing 10% constant currency growth. On our last call, we guided the full year at $345 million-$360 million of revenue. You can see that we, you know, we are generating income and cash. In fact, our EBITDA margins are in the mid-30s, and we've consistently put up EBITDA margins in that neighborhood. From a capital and cash perspective, we have cash on the balance sheet. Net leverage is less than half a turn.
Capital allocation-wise, we've been an acquisitive company during our history and continue to look for opportunities in that space, particularly in the software area.
Great. Maybe, Bill, unpacking a few of the things you said. So one on just the history of Certara, you know, formed because you joined an informatics company and a modeling company, and I think shortly thereafter, Simcyp was acquired. Can you just maybe explain the logic of your different software offerings? Are they all complementary with one another? Do customers tend to use everything? Can they use everything? Just kind of how you think about it strategically.
Yeah. So thanks for the question. We have in the company something like, depends on how you count, say, 12 software products, but three of them constitute 80% of the software revenue, so I'll just talk about that. So the three products, so one of them is... Well, two of them are focused on biosimulation.
There's two flavors of biosimulation, so one is predictive, and one is analytic. So predictive is: we're developing a drug, we know very little about the drug. So we're developing, you know, we're using information from the scientific literature and whatever we can glean about similar drugs to predict what's gonna happen in the next stage of drug development. That product is our Simcyp kind of flagship product, and, you know, it has kind of been the form—it's been kind of the basis of the company. It's a very unique product. It has a very loyal following among both big companies and small. And it's, you know, it's... How do I put it?
It's a product that, you know, it's fostered by the FDA, you know, I would say, generally, it's become part of the infrastructure of pharma development because the FDA likes biosimulation, and it's become the premier product. We have another product that's much more widespread. The idea there, instead of predicting pharmacokinetics, we analyze clinical trial data and fit the kinetic model to that. Everybody needs to do this in pharma at some point during drug development, usually multiple times. That product has tens of thousands of seats that cross everything from large pharma to small pharma to academics to CROs. That one's called Phoenix. And then the third one we have, we acquired in 2021, our product called Pinnacle 21. It's a very different sort of flavor.
The idea there is, we're worried about how you submit clinical trial data to the FDA. It's basically a product for using data validation. The idea is we wanna have all the data that pharma is handling to a certain, meet a certain standard. By doing that, cuts a lot of cost out, but also enables the use of biosimulation. Most companies, probably almost all the companies that are developing a drug today, are gonna buy those products at some point. I would say almost probably everybody has to use Pinnacle 21, because at some point, you submit your data to the FDA, and they pretty much require you to use that. Our Phoenix product is pretty widespread. It's been out a long time. It's kind of an industry standard.
Probably the smallest one in terms of, you know, potential share, we could, you know, the smallest share and then maybe opportunities to gain is, is in Simcyp, and that has to do with just the sophistication of the product. The products were all acquired separately, and over time, we've been integrating them more and more. They do use common data that gets passed from product A to product B. And so there's been opportunities to do that, and then the number of our acquisitions of the smaller software products have been designed to kinda, over time, unite this into a, a wider platform that we can, that we can basically do bigger deals with.
Okay, great. When you call out your seven-figure type ACV accounts, are those distinguished by just number of users, or are they much more progressive in how they're using Certara, working with Certara, and that distinguishes them?
Yeah. Almost all of the largest companies like that are. They got there by purchasing multiple products from us. Some of them are large companies, large customers simply because they are very large companies.
Mm-hmm.
But it's not 100% overlap, so that, you know, there are surprising names in there of, you know, companies that are spending a lot of money with us, that are not necessarily the largest companies around. And that happens also because, you know, they'll have a, you know, large, late-stage, you know, trials going on. They're spending a lot of money. So generally, you know, we're, we're looking at people buying, you know, several software products, and then with them, they're, they're typically becoming service, you know, services customers for one or more of our areas. So that's kind of, that kind of integrated offering is, is the, is the overall strategy, and those are the companies where we're, you know, we're seeing that really pay off.
Okay. You've, as you've noted, you know, these updates have been moving in the right direction. Same can be said for your software net retention disclosures. I think last quarter, it was up to 112%, and so what you just described is typically the evolution of a customer relationship, as it's more modules and then more users of said modules?
Yeah. So the formula on software is that it's a pretty sticky software, so in any given year, usually between 90% and 95% of all of the seats that we sold last year will come back and renew this year. So we... Let's say we're gonna get a 95% renewal rate. On top of that, we have, you know, let's say mid-single digits, typically price increases, then you have the ability to sell additional seats to our customers. And then we have increasingly, over the last couple of years, we started launching new products, and that's kind of ticking that rate up to 112%. So over the last...
We've always had a pretty good net renewal rate, but it's been ticking up over the last couple of years as we get these new products out there.
Okay. So once you have a valid biosimulation result, then kind of the work begins to incorporate as part of a regulatory process, and that's where a big part of your services business can step in and be helpful. How would you maybe in the similar vein of just how your software is distinguished, how would you maybe define differentiation for your regulatory services?
So the reason why we have the regulatory services originally was because it's important in biosimulation to be knowledgeable and credible in the regulatory area, because we're advising our customers to make decisions in their drug development, which are gonna have regulatory implications. At some point, maybe even a couple of years later, you will have to explain to the regulator why you did this. And, you know, pharma is a notably and logically conservative area, so we had to be knowledgeable in, you know, what the latest regulatory trends are and experienced with the FDA.
What we've found is that there's also been a segment of our customers that have been quite interested in the fact that we have a kind of a boutique, onshore, high-end regulatory services component, where in most cases, we know a lot about your drug because we've been working with you for a long time. That segment tends to be in the smaller size, like in the biotech area. So in the last couple of years, we've done really well with biotechs. It's growing a little bit less aggressively right now, just basically due to funding pullback in that one particular segment. But we have a good profitable offering there.
It's also, as you can tell from our chart, we have regulatory software as well, that kind of underlies this, which also gives us a, you know, an attractive cost position as we're delivering this, so.
One question that has been coming up more recently is just how, customers kind of think of Certara, because it seems like on one hand, the biosimulation performance has been better than expected. And, you know, I think about how our estimates have changed over the past year, it's a lot better. And yet that seems to be separate than what regulatory has been going through. I guess, why aren't they more connected, so if one is doing well, the other one is doing well?
I think what it is, we have a very broad customer base, as you can see, 2,300 customers, and so when you have a segment of the market, at some point, that either does outstandingly well or lags, that we do see that. In the case of our regulatory business, it's very highly concentrated on that smaller side segment, so that's what's kind of making it go a different way. Right now, you can tell with our software business, it's quite healthy. You know, a lot of our software revenues are coming from either late-stage drugs or large companies, and so that segment's doing, you know, quite well and still growing.
And, you know, a couple of years ago, when biotech funding was really strong, we were seeing a whole lot coming on the other side. So I think it's, to some extent, you know, just the cycles of the industry that are happening there, so.
There was a brief comment made on the second quarter call where I don't want to say it's green shoots, but you were starting to see maybe a month-over-month improvement in services activity. Not the forecast was adjusted, in one way, I think, to better encompass some of the things you just mentioned. But I wanted to hone in on that month-over-month comment, and maybe see if there's any more recent updates you can say about just the performance in that side of the business.
Maybe you want to take that, John?
Yeah, yeah, I'll take that. So I think... So what we're seeing is the business is performing in line with the expectations that we laid out on the August call. The bookings cadence in Q3 is lining up to be similar to what we saw in Q2 from a sequential dollar perspective, and that's consistent with our internal plan. So that's, you know, that's a little bit about performance. The management team is very focused at this point on converting the pipeline. So we have good visibility on the pipeline and converting that to bookings, and then ultimately to revenue, both in software and in services. A couple of other comments around the steps that we've taken from a go-to-market perspective related to aligning services in regulatory with services in biosim have.
You know, we've got good initial feedback from customers on that, and also positive feedback on the integration of the sales force that we've done. On top of that, we're continuing to invest in software. In fact, we've recently launched another Simcyp product, and we're also very excited about the efforts that we've made in AI, where, you know, already for a couple of product lines, we have the Vyasa acquisition AI integrated into those products. But there's really a lot more to come there, both in the regulatory space and in biosimulation.
Maybe, since you brought up AI, we can have an AI discussion, and I think a few different things are needed from kind of an underlying infrastructure standpoint, and Certara was already moving in this direction anyways. One is just having data in the cloud, so having, you know, more of your applications cloud-based and, you know, you're starting to see cloud native now. Where does that stand as a portfolio? And then we can talk about AI specifically, just cloud readiness in your offerings.
Sorry. The cloud readiness of AI offerings, you're talking about or just the?
Of Certara's kind of established-
Oh.
Software portfolio.
Okay.
'Cause, correct me if I'm wrong.
Yeah.
But I think that's kind of an essential building block-
Right.
That AI will then need to utilize.
Yeah, good point. So, like a lot of software companies, we've been making this transition from term-based on-premise licenses to SaaS. Right now, I think 57% of our software is SaaS-based, and that's been increasing sort of like 3%-4% a year for the last couple of years. Several of our products we provide are both SaaS-based and on-premise, just because there are clients that want both, but overall, you know, like, just like a lot of other clients, and for reasons like you're talking about, we're expecting and investing in increased shift to SaaS. There are some, you know, accounting changes when you switch to SaaS because, you know, your revenue recognition changes.
At the same time, you typically charge a higher price for the license because now you're managing things that previously the customer's IT department was. For us, that's balanced off nicely, so we're not seeing, you know, what has happened in some companies as they make that shift, as you see a temporary dip in revenues. We've managed to grow through that.
Mm-hmm.
It does provide the basis for what you're talking about for AI. The trick with—you know, one of the interesting things about SaaS is that, we don't have the rights to our customers' data, but it is flowing through the system, and once you know where it is, you can start to sell—you know, you can start to do things with it. You can start to sell them additional, additional products and, and, you know, do some more creative things like add AI engines on top of them, so.
So how do you see your product set evolving, specifically around AI? And I think, you, you already have some unique assets. You have the Integral product, so you have stores of information-
Mm-hmm.
That are probably helpful to your customers as they think about wanting to actually tap into their data and use their data for ultimately an AI application. But then, you could also be building the AI applications themselves. I guess, what, what could we maybe expect out of Certara from an AI product standpoint?
So I think we did make a very well-timed AI investment. It wasn't because we saw ChatGPT coming along, but we did see a trend for what we could do in biosimulation with AI. There's a couple of interesting aspects to it. So one is there's a tremendous amount of unstructured data in healthcare and in pharmaceutical development that is kind of difficult to take advantage of in biosimulation, or really in as people are making decisions in drug development. So a lot of our customers are very excited about opportunities like that. ChatGPT is sort of like one example. I mean, it's its ability to generate text, which is kind of unstructured data, but it goes the other way, too.
You can, you can cause it to analyze lots of scientific papers or clinical data reports, things like that. The company that we bought, I think, was. They had a vision about the fact that there were gonna be AI engines, but to make it useful in healthcare, we were gonna need to tap into specific databases that exist in healthcare. So some of the databases might be, for example, all of the papers that are written on a particular therapeutic area. But all of our customers have... Actually, not all, maybe not all, but a lot of our customers have large internal databases that they also want to make available to the AI. So the product that we bought makes it very easy to basically integrate many different databases to the AI engine.
So one way to think about it is, rather than just using ChatGPT and asking a question, you ask a question, and it will give us an answer for within the data that we've specified, as opposed to just, like, I don't know how it made up an answer and whether even it was correct. It will give us references. It will summarize things. So, you know, that turns AI from a general purpose tool to, in our case, a healthcare-focused tool that I think can solve a lot of problems that our customers have. It also gives us a lot of interesting opportunities to just sort of integrate in value-added features in our software for which, you know, we can charge an additional amount because we're just delivering extra, extra value, so.
Mm-hmm. Mm-hmm. That's great. Any questions from the audience? Okay, John, to your point about uniting kind of the sales teams, I think it's somewhat surprising, you know, it's just an indication that there's still things Certara is doing to kind of optimize the organization. It's surprising from a standpoint that you have mid-30% EBITDA margins, so it's already a very kind of well-run operation. But I think there's more to do when you look at the implication of all your functions now under one leader. What can that kind of unlock going forward, and what's kind of the milestones you're hoping to achieve going forward?
Yeah. So we think the opportunity there... And you're right, we think the margins that we have are certainly best in class and show a lot of discipline down our P&L. We think this step with the integration of sales provides an opportunity for us to really have sort of one view of Certara as we approach our customers with the mindset that, you know, we're able to sell them the whole portfolio of products, as well as over time, increase the call point within these customers that we're interacting with, so that we can pitch the total value proposition of saving time, creating efficiencies, and saving money by using biosimulation on clinical trials.
So that's, you know, that's what we're seeing over time, and the early feedback has been very positive.
To go back to, Simcyp new products, a lot of these more recent efforts have actually been moving Certara earlier in drug development and actually moving into the discovery phase, which I think when you break apart the $13 billion TAM, a lot of that is actually in discovery. And to this point, Certara has been more, I think, kind of phase II, phase III exposed. Why do you think, or I guess the question is that opportunity, how is Certara thinking about tackling it? Because there's a different competitive landscape. There's kind of established providers in some aspects. What's kind of your path to market there?
Yeah. So probably 70% of Certara's revenues right now is coming from the clinical phase, and that was not accidental. I mean, there's a lot of money in clinical budgets, and so it was a good place to grow the company. But the thing is that what happens with most of biosimulation now is it starts after our customers have chosen their drug candidate. So they've chosen the drug candidate, and then we start biosimulation. There's one of our visions has always been to integrate this, you know, what I call end-to-end, like from the very beginning of drug discovery through approval.
If you could do that, you could start to ask questions very early on as you're selecting your drug candidate about not just, "Hey, is this a molecule that's likely to match a specific target, but is it likely to make it through clinical trials?
Mm-hmm.
Which would add a lot of value. So, you know, said a different way, we'd just like to catch it—we'd like to catch the customers a lot earlier than we do. And to do that, that's kind of led to an interest in discovery. We have one product in discovery called D360. It's growing nicely, and it's a valuable product, but, you know, right now, it's probably single digits portion of our revenue.
Okay.
And so we see an opportunity to expand there. Having said that, you know, we're not a venture capital company. We're not out looking at acquiring, you know, technologies that are unproven. So we're, you know, we've been cautious about how we think about that market, so.
Okay. Just maybe in the time remaining, talking a bit about kind of your financial profile. I think 2022, as I do a three-year look back, revenues ended up growing pretty close to 20%. There's M&A in there, but, close to 20%. And then in your proxy, you kind of align your incentives with 15%-20% growth in both revenue and free cash flow. Maybe think about if, if we could see kind of the, the ground level and up, kind of build out of how you get to a mid-teens plus type of growth rate. What do you think some of the biggest, drivers are for the business?
Yeah. So, we talked about some of the customer metrics earlier. That's a big part of how you get to that growth profile. We said the renewal rate was—has consistently been in the mid-90s. As you noted, Joe, the net retention rate for the software business has been increasing and has increased even from Q1 into Q2 sequentially, and is at Q2 stood at 112%. Those are—in addition to launching the new products that Bill was describing, those are keys to continuing that momentum into the future.
And when you combine that with an outlook on the services business, you know, where we believe some of the weakness that we've seen recently will drive some recovery into the future, is how, you know, over time, we'll be at that mid-teens growth.
When you think about the outlook for regulatory services, in the past, it has been framed as actually being one of your fastest sources of growth from just a TAM standpoint. Obviously, quite a few things have changed about the nature of the TAM, so it's a bit different today, but any kind of way of, you know, when you think of biosim, it's been mid-teens plus. What about that regulatory piece in terms of kind of an enduring growth profile?
Yeah, you know, we mentioned that the regulatory business is where, you know, some of the recent weakness that we've seen, and the growth has slowed there. We think we can return to growth in regulatory, and the regulatory business, for us, has a margin profile that's consistent with the overall Certara margin, and so it's throwing off considerable cash that ultimately is being invested in the overall focus of the company, which is on biosimulation.
There's always a question on how your bookings inform kind of next 12-month revenues in... I'll frame the question specifically in services. When you think about bookings trends to this point, does it preclude a return to growth next year? Is next year too tight a time frame, or is that in the realm of possibility?
Without providing guidance, we expect to grow the company. That is what the management team's expectation as we finish out this year and move into next year. The formula around bookings has historically been an important indicator for what revenue will be, but I think it's also important to recognize that some of the delays or elongation of the bookings and ultimately bookings to revenue cycle also leaves the opportunity for us to continue to take the considerable bookings that we've had over the last six to 12 months and continue to convert those to revenue over the coming quarters. So we're at a position where we feel we'll be growing the company moving into next year.
Great. We're out of time, but please join me in thanking Certara.