From Certara, who we minted CFO, I guess, relatively speaking.
Thanks for having me, Luke.
Yeah, thank you again for coming. I was just thinking we kind of just kick it off with kind of the headline key results from the quarter and kind of dig in from there as we get into the bookings and demand environment.
Yeah, sure. To start off, Q4 we had solid results as we look at the bookings. We were aided by the acquisitions that we'd done, not only of Chemaxon in October of 2024, but also some of the acquisitions that we had done in the tail end of 2023, which we hadn't lapped quite yet. The strong bookings results you see on a headline number on an organic basis kind of fell in line with what you saw organic revenues at. We ended the year with a 32% adjusted EBITDA margin, which was right in line with our expectations on the year.
Of course, you probably recall that we had about halfway through last year, we had taken some actions to drive the utilization in our services group and to take out some excess capacity, and that increased the margin in the back half to end up in the range where we had intended.
All right. And just a little bit on that, because before we get into the demand environment stuff, but talk about, because this is largely a services business or largely software business, but even if your services piece has a large software component. So where were you able to drive that productivity improvement among your services component? And you talked about taking capacity out. What was that?
A lot of that was due to the regulatory business. The regulatory business in Q3, we had indicated that we were doing a strategic review of that business. That is mainly because the core focus of the company at this point is on biosimulation. As we were looking at the performance of services over the last, not just in the middle of last year, but really over the last year plus, we were seeing a sustained overcapacity. That made sense at that point for us to take some of that capacity out, which drove a higher gross margin into the second half of the year.
On the strategic review on that regulatory piece, how much of an incremental margin driver would that be once that's fully gone?
We did not quantify what the margin, the potential for margin accretion would be if we do decide to move forward with divesting reg. What we did say is that the reg business has a profitability profile that is attractive. It is a $50 million business in revenue. We said that the margin profile is 20%-30%. That is certainly an attractive business from a profitability standpoint.
Gotcha. From going back, you had a nice step up there in bookings across the board. Talk about the demand here from large pharma versus biotech, just the overall 30,000-foot view that everybody wants to try and figure out.
Yeah, yeah, we saw. As we were exiting the year, we saw some of what you've heard everybody say, I'm sure, is we've seen some slowness in tier one. Tier one is the big pharma companies that are our customers. Almost all of them are our customers. We're seeing some slowness in decision making, which is driving some slowness to bookings. We believe a lot of that is a result of the portfolio prioritization activities that they've been going through, some of which have resulted in headcount reductions at select big biopharmas. For us, that translated, we made some commentary on the call, that translated to an impact on our Phoenix product line, where we saw some slower renewals and some reduced seat licenses.
That makes sense. I mean, it's your software, you're replacing seats and if they're restructuring.
Exactly. Now, the flip side to that is we've seen continued and sustained strength in Simcyp. We have been very pleased with the continued strong growth from Simcyp. On top of that, too, Chemaxon had a very strong Q4. That was one of the key drivers of the high growth rate in bookings in Q4. Some of that is due to seasonality in Chemaxon, but some of it is overperformance too. They are coming out of the gate together with Certara very strong. We are happy about that. You asked me too about the biotechs. We define them as sort of tier three customers would be biotechs. They have performed well during 2024. We definitely saw, thanks to the funding environment improving during 2024, some pull-through into our tier three business, both in software and in services.
As we approach this year and looking forward and seeing what's happened so far this year too, we just want to be cautious that what we haven't seen is a full recovery in tier three. We are watching closely what the funding environment looks like in 2025.
As you think about the different kind of debundled a couple of years ago, all your software so that you could broadly attack the biotech customer individually according to what their needs are. Talk about where, when you're seeing this recovery, slow recovery that you're talking about and the demand coming back, is there a particular software service that they're more focused on? Is this like, all right, we're going to buy this first, and then we'll go and think about these other offerings later, or it's pretty broad-based?
Yeah, I mean, we now have four key pillars in software. It is Simcyp, which we talked a bit about. We talked about Phoenix, which although impact from tier one customers still obviously growing this year. Pinnacle, which has been a strong contributor. Now we are adding Chemaxon to that. Those are the four key pillars of the software business. I would not say there is any one of them that is really the star. Our commercial team is attacking each of them. Each customer's needs are different. Now that we have added Chemaxon to the portfolio, we now have a presence across drug development, including in discovery, where our footprint had been smaller previously.
Right. On that discovery piece, that's been relatively, that's been the really most soft part for the last couple of years is the restructuring that come through. Chemaxon really exceeded expectations there in Q4 . How much of that is just being under your umbrella and having a larger commercial org pushing it versus actually you started to see that drug discovery market start to bottom and come back?
Yeah, yeah, to be clear, we haven't seen, nor does our 2025 guidance contemplate an inflection point during this year. We are assuming that end markets, whether it be tier one customers or tier three customers, that the spending patterns and what we've seen from some of the dynamics in those end markets would be the same in 2025 as what we saw in 2024. Specifically to your question on Chemaxon, Chemaxon, what we're seeing is also a seasonally, has a seasonally strong Q4, much like the remainder of Certara, which usually has a strong Q4 also. We actually think that that's the key driver around the strong bookings that we saw in Q4. Not so much a recovery in the end markets as it is just some seasonality that we're getting to know in that business.
Okay. As you talked about the four pillars and kind of coming out with the unified cloud and being able to deliver that, and that's kind of a longer-term growth driver over the medium and longer term, obviously. Talk about the integration into the unified cloud and how this is some early wins and early feedback and demand there.
Yeah, yeah, yeah, that's a good question because in our guidance, we talked about the investment in R&D that we're making. There are three key areas of R&D investment that we're making during 2025 and beyond, and one of which, of course, is unifying the technology architecture behind our various platforms and shifting to cloud. That is one area of the R&D investment that we've been discussing. We think that's going to aid the customers. It gives us some pricing, it gives us some pricing power as we shift to the cloud. That process has already begun with the hosted version of Phoenix, which we've been beginning to ramp the conversion of Phoenix hosted into the cloud. We're excited about that as a prospect, but then unifying the entire architecture of our software offerings is a key part of it of the investment this year.
The other two parts of the investment is in AI. We want to continue from the acquisition we did of Vyasa back in 2022. We've been investing in that technology. Last year, we rolled out the Co-Author product, which is AI for regulatory writing. That's a good opportunity. We're already seeing bookings and revenue come in there, but we're investing further in AI. The third area of investment that we're making in R&D is on new products and features within our existing platforms. We think it's very important as you think about Phoenix, Simcyp, and Pinnacle that we're putting new functionality, new features that are attractive to our customers. We're doing that inside of this year and next year.
Following up there on the AI, I mean, technology adoption within pharma and the drug development space has always been very slow. You're already offering simulation software and providing some of these bleeding-edge tools, and now you're going to roll on AI. Where do you think the low-hanging fruit or the opportunities for AI within your business or within the pharma development chain are most realistic versus, hey, we're going to have AI develop a drug and we do not even need to use humans anymore, right? I mean, that is like what you have, the two ends of the spectrum there.
Right, right. Yeah. That end of the spectrum is not where Certara plays, as you know. What we see, so I mentioned Co-Author, obviously we're excited about that. That was certainly some of the lowest hanging fruit was using generative AI and apply that to a regulatory writing practice, which creates a ton of efficiency in creating drafts and revising drafts in preparation for submitting to the FDA or other regulatory bodies. That is the first piece of it already on the market, already selling. We are pleased about that. As you look forward and how does AI further get rolled out under the context of what Certara does, you can start thinking about clinical applications as it relates to, say, for example, Simcyp. Simcyp is a product that's highly complex software and with a lot of data. It's been in place for a long time.
The aggregated, accumulated data and learnings from Simcyp over time and automating and gaining speed to understanding and gaining speed around modeling capabilities for Simcyp is one of the next phases that we're focused on for AI.
From the regulatory writing, this was an area that was under pressure for, I guess, two years ago. It was pretty soft all through, I think most of 2024, started seeing that start to come back. On that writing piece, you guys had the services side. When is you're rolling out the Co-Author, how much cannibalization is going on there? Or is this more of it's just giving your regulatory services piece another tool for them to use instead of actually being more manual? I mean, just how's the pricing work there?
Yeah, yeah. We're approaching AI from both angles, actually. It's a good question because we're selling Co-Author, as I mentioned, and we have paying customers for it. In tandem with that, we're also using the AI technology on our own staff, are utilizing that when you think about biosimulation services or certainly for regulatory writing services to be able to find efficiencies in the existing processes that allow us, put us in a position to be able to take on more volume while spending less time on it. That is another key use case as we think about Co-Author.
Okay. Continuing on the pricing dynamic, just you guys have been able to get decent pricing each year. How's it with the tighter budgetary environment among large pharma, and especially among biotechs? Is there a strap for cash as well? How have the conversations been going from a pricing perspective? Is this kind of the new normal that we should be rebasing on? Just thinking long term.
Right. Yeah. I mean, because we're the market leader in biosimulation and because of our strong presence, we do have good pricing power. We're also, I think, reasonable and consistent with annual price increases. We've continued to carry that practice even in times where the end markets have been more challenging. I'd say on the software side, we've been able to maintain our pricing on an annual basis. On services, we've had to adjust price in some instances, not reducing price, but just raising price a little bit less on the services side as we've seen the demand profile in that business change more during the last two years.
Okay. From a margin perspective, your margin guide for the year contemplates about that 70 basis points of contraction. You talked about some of the investments you're making. You have Chemaxon coming on board. You're bringing things onto unified. Talk about the different buckets there organically, what's going on. You're not able to get as much pricing. You might have a little bit more wage inflation. Talk about what you're seeing there from a margin perspective. This is where the jump-off point, we should expect things to be approved from here or kind of flattish over the next year or two.
Right. Certainly for 2025, it is a year of investment, as you said, Luke. We are focusing the investment in 2025 on R&D. I explained the three buckets, so three key areas that we're focused on. When you look back to 2024, we invested in 2024. That was mainly in the sales and marketing team where we've fully built out a commercial and marketing team. We think that that piece of the investment is behind us now. We've built that out. Those expenses will continue to grow, but grow more in line with organic sales growth. As we focus on R&D, then that's an area that is impacting the margin, as you saw. Our guidance for the adjusted EBITDA margin was 30%-32%, which is down, I guess, as you said, 70 basis points from the prior year.
Some of that is the investment, sort of continued investment, if you would. Then about 50 basis points of it is from Chemaxon. As we've said, a big piece of the integration activity with Chemaxon is getting their profitability profile up to Certara's adjusted EBITDA margin. We're committed to getting to that spot as we exit 2025. We're on good pace so far.
Okay. After that, it should be back to how things were consistently, kind of.
Yeah, well, the investments that we're making, I mean, clearly we're making those investments because we think they're going to catalyze growth, one with our commercial team, two with the software investments and development that we're making. As that growth, and hopefully there's some cooperation from end markets, perhaps as we don't have it in the guidance this year, but as we move into 2026 and as that happens, then obviously our revenue growth would increase and it better positions us for margin expansion into the future.
Yeah, it's just going to hit that level. From your guides this year, given all the various headwinds that we've seen across the end market, your longer-term guide has always been that mid-teens growth, and then you'll add some more M&A on top. As you're thinking past 2025 and your kind of exit rate, it still implies you're going to need to step up there to get to that mid-teens. How do you think about the momentum that you're going to build? From a bookings visibility perspective, how that kind of paces out through 2026?
Yeah. Yeah. The path back to a mid-teens growth rate for the company is really predicated on a couple of different things. One is our investment in the company, which we've talked about, sales, marketing, R&D, and that's going to catalyze growth. The other is the end market. We have seen now on a prolonged basis, pretty difficult end markets, whether it be big biopharmas, whether it be biotechs. As that dynamic resolves and presumably goes back to where we've seen historic levels, if you take both of those together, we don't see any reason why Certara wouldn't be growing in the mid-teens in that kind of an environment.
I guess just from a philosophical or however you want to approach it, but right now it just feels like this has become the new normal among biopharma. Yes, we will eventually get back to that era of continued and strong investment. When you're thinking about that LRP, over the next three years, should we be thinking about your base business growing in this high singles, low doubles as just kind of, all right, well, if things do not get that much better and we do not hit that inflection in the biotech side and biopharma stays tighter for longer, is that a more appropriate way to think about your business growth in the out years as well? Right now everybody's kind of modeling, okay, you have high singles this year, maybe low doubles, and then next year you're getting back to that mid-teens.
Instead of having that cycle of, well, things aren't playing out and you're having to pull some numbers down, is it more prudent for us to think about this as kind of like a high singles, low doubles digit over the next couple of years and we'll get back to that mid-teens when things unlock?
Yeah. I mean, we're certainly doing our part to drive the growth in the meantime. Q4 is a good example of that. Difficult end markets in Q4 for sure, yet we posted a solid quarter in the face of that. That's the execution from the commercial team that we've been growing and investing and putting in place. I don't disagree with your point. I think we can drive some level of growth despite the end markets. To get all the way there, which I think is what you were saying, to get all the way there back to the mid-teens, we would need the end markets to aid us as well.
Yeah. All right. That's fair. Lastly, just kind of wrapping things up these last couple of minutes, going back to that quarter, we talked about tier one, you said was strong, and then tier three was from a bookings perspective, you saw strength, but the tier two customer. Walk through what's going on there and the conversations you're having. What kind of customer that tier two ultimately fits? From an outlook perspective, where's the recovery or trough?
Yeah, yeah. Yeah. The way we define the customer, tier one customers are customers whose annual revenue is $5 billion or more. That's the big pharma. Tier three is less than $100 million of revenue. The tier twos are in between that. They're obviously deep into commercialization. The larger ones are nearing the edge of being a big biopharma company. You're right, that was on the services side for Q4, that was the one area where we saw a decline in bookings, at least on that quarter. That was mainly driven by the regulatory business. Our biosimulation services business during the quarter grew well, but it was more than offset by weakness in the regulatory business in the tier two category.
Now, one thing that, to add on to that point, tier one alternatively for regulatory actually returned the regulatory business to growth in Q4. It was the first time during 2024 that we'd posted year-on-year growth in bookings. As you think about the regulatory business, it impacted the company's tier two performance, as you pointed out. When you think about regulatory and the performance on the quarter, it was actually quite good because it was the first quarter that returned to growth, not only in bookings, but also in revenue. That was centered mainly in tier one customers.
Do you typically see it kind of as a tier one started and then it kind of flows down, like into tier two and then tier three? As you think about pharma spend and going down to the small biotech?
Not necessarily, but what we have seen is that tier one, as it relates specifically to regulatory, tier one, we tend to have our heaviest quarter of bookings in tier one in Q4. I think that rather than it necessarily trickling down, I think we're seeing better performance in the tier one category in regulatory. That's due to execution and focus, but it's also due to just typical seasonality we see in that business and getting some of the bigger customers and bigger deals at the end of the year.
Gotcha. All right. Lastly here, M&A always a big part of the story. You seem to have been adding a bunch of businesses. The integration seems to be going on track, if not a little bit better. Talk about areas where you would like to play. You have four legs of the stool. Is it just more about bolt-ons around those, or do you see maybe a fifth leg to, I do not even know if that is a stool anymore. That might be a table or.
It's a table then, right?
Yeah.
We think that, we've been happy with the investments that we've made and the choices that we've made with M&A. You're right, it's really built out our footprint across drug development at this point. We certainly have the balance sheet capacity and the cash to be able to execute on additional deals. We're very focused on the integration with Chemaxon, but at the same time, we wouldn't want to exclude an opportunistic software deal that would be a near adjacency to the pillars that already exist at the company now.
Perfect. Thank you. Appreciate your time.
Thanks for having me.
Yeah, you got it. Thanks again.