All right, welcome, everyone. Let's go ahead and get started. This is the Fireside Chat with Certara. My name is Vikram Purohit. I'm one of the Biotech analysts with the Morgan Stanley Research Team. I need to read a brief disclosure statement. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, I'm very happy to have with me the team from Certara. Thank you both for joining us. Really appreciate it. We have roughly 25 minutes and a good amount of material to cover.
But Bill, maybe I'll turn it to you first, just for some opening remarks, just to kind of level set us on, some of the key milestones you feel like Certara's hit throughout the year, some of the key inflection points for the business overall, both on the software side and on the services side, and then we'll dig in deeper from there.
T hat's great. It's great to see you. Thanks for the question.
Of course.
Certara is fundamentally a biosimulation company. We're devoted to creating mathematical models of biological processes that'll let drug companies develop their drugs more efficiently. Primarily, we're interested in helping them reduce the use of human clinical trials, which are very expensive and a good place to focus efficiency on. As a company, we're focused, you know, we do that in a couple of ways. So we are fundamentally a software company with a very big services arm. We need to do that in order to be, you know, help our clients be successful in biosimulation. So if you look at us as a software side, we've launched a couple of new products this year. Recently, we launched a new Simcyp product targeted at, you know, more preclinical areas.
We've launched a new AI-based product called CODEX, which uses artificial intelligence to search databases of existing clinical trial data. It can give you some idea how your drug will do going forward, based on existing data that's been tested on similar drugs. We launched new features like basically the ability to use AI to predict interesting molecules for discovery scientists to pursue based on say a couple of things they're interested in right now. So that's been an exciting opportunity. We acquired a company called Vyasa earlier this year, which was a very well-timed acquisition in AI.
I think we bought them a couple of years before everybody figured out what ChatGPT was, and so we've been investing a lot in making that a reality and showing some pretty significant success. We've also been building up our services side as we went through the year. We've combined our biosimulation and our regulatory services into one big group, so that we can offer a more integrated opportunity to our clients. We're seeing some very good uptick from that. You know, we're continuing to invest in both that and in creating new software as we move forward.
Great. I want to dig in a little deeper on 2023 performance trends and both sides of the business overall. But before we do that, just to kind of orient us, could you both mention just some of the key metrics that people should keep in mind when they're evaluating Certara's business on a kind of a full year basis and also on a quarterly basis? Like, what are the key parameters to look at to get a sense of how the underlying health of the business is progressing?
Vikram, thanks for the question. S ome of the key metrics to look at would be our, our bookings, would be to start. T hat's where we're taking visibility from the pipeline, converting that to bookings. And then our conversion of those bookings to revenue is, is obviously the first place that you'd want to start. A couple of other metrics that, that would be important would be our net retention rate in the software business. On the quarter, it was 112%, which is actually up sequentially from Q1, so we've been pleased with the results there, and that's indicative of existing customers that are expanding their footprint, and taking on more business from us. A couple of other metrics that are interesting, too, is around customers and the size of customers.
W e do track customers that are greater than $100,000 of annual business, and we also track customers that are accounts that are greater than $1 million of annual business, both of which have been growing on a year-over-year basis. But maybe a good time to just give a little bit of an update on how the business is actually doing, too.
A s we look the business is performing in line with the expectations that we laid out on the August call. The cadence of the bookings that we're seeing in Q3 are consistent with, and are very similar with what we saw during Q2 and that's consistent with our internal plan. The management team is, of course, very focused on taking what the visibility that we have in the pipeline and converting that to bookings and ultimately revenue across the product portfolio of software and services. Bill was touching on some of the org changes, too. So we've seen really good uptake as far as the combination of the reg business combined with biosimulation.
We're seeing and getting good feedback on that from the customers, as well as positive feedback on the integrated sales force. T hose are all good touch points. We're continuing to invest in software. So Bill mentioned before, we're investing in software, and we've launched a new Simcyp product, and we're very excited about the efforts that we have in AI. We've already rolled that out in a couple of products, and in addition to that, you know, there's much more to come on the AI front, both in regulatory and in biosimulation. So that's a bit of an update on just how the business is doing and how we're seeing it during the quarter.
Understood. And I was actually gonna ask you how the org changes you mentioned during the 2Q call had been playing out. It seems like you're saying that they've been well organized internally, well received by customers. W hat exactly did that org change achieve that has been beneficial to clients and customers? Is it just an easier point of sale? Is it just interacting with one person who can talk to you about two different offerings, and therefore, it's just easier to complete the sales cycle, or is it something else?
Well, I can start, and then our Biosim business is complementary then to the regulatory business in the sense that we're already working with customers for biosimulation and it's a natural cross-sell point, for us to also sell them, the regulatory services that we offer.
So I think it's worth pointing out, the bigger point of Certara is around being a biosimulation company, not being a collection of individual businesses that we bought that are providing different services or software. So I look at this as the natural evolution for us, right? We were formed from a lot of acquisitions. We've gotten to the point where having, and particularly on the services side, we've had internally two services groups, one focused on regulatory and access, one focused on biosimulation. They have different back offices, different processes.
There's a significant internal opportunity for efficiency, which we can, you know, so better serve customers with. But the bigger point is, you know, we bought these because there's an integrated offering that we can provide to clients to help them with their drug development, and this enables us to be one point of contact to be , of course, we've always had cross-selling incentives for our sales force, but it's one thing to have an incentive to go sell the other thing and another thing to have everybody in one group selling, you know, basically all the products in an integrated fashion to a customer. I think it enables us to move up at a higher level, to talk to a higher level of management and our customers do bigger deals.
It's a bit early for us to tell you, you know, show you lots of statistics on it, but I can tell you anecdotally, we've closed a couple of quite interesting deals already, so people are excited about it internally, and I think there's more to come, so.
Got it.
Okay.
That's helpful. You know, post your 2Q call, there was also a good amount of focus, obviously, on the guidance update. The one question I have for you there, just to clarify it for everyone, is the bookends of guidance. What scenarios and what outcomes throughout the year do those bookends contemplate? And is there any color you can provide at this point on kind of which bookend you feel like you're tracking more towards at this point?
Yeah. So the way to think about that guidance is at the low end. In order to be at that low end, we would need to see further weakness on top of what we've discussed already in both the regulatory business and biosimulation services. So that is what gets you to the low end. At the high end, we would need to see recovery both in the tier three customers, where we've seen, you know, the biotech funding environment impact the services business there. But also in the tier ones, where we said there was a little bit of delay as far as signing new bookings, delay in starting projects in the tier ones.
To the extent that we see that begin to unlock and the biotech funding environment start to improve, that would push us more toward the high end. As I commented, you know, as far as looking at the business during the quarter, we're sort of tracking to our expectations for now.
Okay. Understood. The topic of biotech funding has obviously been. It's been talked about quite a bit, but, you know, when you think about the funding cycle that everyone went through, is going through now, the impact that you've seen and reported on, on your business, are there ways to try to help insulate from these kinds of funding cycle volatilities going forward? Is that something that you think about as a business going forward? Or is it just not possible, given how tied you are to this kind of clinical spend and the business that you're in?
Well, it's kind of a positive and a negative, right? So we have a very broad customer base of about 2,000 customers. We cover everything from big pharma to biotechs. And so if you do that, the good news is you're covering a lot of the market, but if some part of the market, you know, has issues, you know, then we're certainly gonna see it. So, from that standpoint, I don't really. I don't know that I really wanna change that.
On the other hand, you know, we're not a really huge company, and we're serving a massive industry. And so, you know, I think some of what happened was a little bit who we targeted, and there's some opportunities there for us to change that. There's still plenty of activity going on in the pharma industry. It's not like it all dried up.
Big companies are very, very active, and even biotechs, there's a lot of well-funded ones out there that are moving. So I think you know, some of this I'll take on us, is a little bit of you know, who we targeted and you know, what you know we were you know, maybe concentrated a little bit on the wrong side of the market, and we're adjusting, as you would expect, as we go forward, so.
Y ou've often talked about a tangential topic, you've often talked about just the, the size of the TAM that's out there for biosimulation and for your entire umbrella of products. L ooking into 2024 and beyond, what do you think needs to happen to work from where your current revenue base is, to work more aggressively towards, that TAM? W hat needs to happen or what levers can you pull with your products, with your teams, with your company? And what do you think needs to happen, if anything, from a macro standpoint, to enable working towards that TAM?
Yeah. So the TAM expands in a couple different ways for us. So one is just sort of the overall utility of biosimulation. So what, you know, there's general biosimulation, and specifically, is it good in this use case for this therapy? And over the last 20 years, we've been gradually expanding that, right? We've added cell and gene therapy, we've added immuno-oncology, w e've added vaccines, we've added neural models for working on Alzheimer's.
And there's a lot of white space that we still have to work on. When I say work on it, some of it's developing the models, some of it is getting to the point where our regulators feel comfortable in letting a customer bring it through. And there's this endless cycle of doing this that we've been working through for years, and we're continuing to do that. And I think this is the bigger point, and we're accelerating it, particularly after we went public, because we're able to put more sustained R&D in that. So I think as we go forward, we can see that growth rate tick up. The second piece of it is, you know, just generally the regulatory environment.
There's some things that are positive for us. You know, I get asked questions about non-human primates and the shortages that are of them. And that's tied into the FDA Modernization Act, which is generally pushing against using animal models. Well, one really good way to do that is to do more biosimulation. And, you know, we have models of animals that you can use for translational studies and things like that. So that's a, you know, maybe not an immediate light switch kind of a turn off but another tailwind that's happening for us. Third thing is just generally, you know, we've been expanding the number of seats that can be bought of our software.
So, you know, give an example, you know, Simcyp's a, you know, it's an expensive, very versatile product. It does a lot of things, and in the hands of a very skilled user, it can do a lot of things. And that's our core hardcore users, that market. But there's a lot of people out there in pharma that just want to solve one specific problem.
Don't wanna, maybe don't want, don't need or don't wanna pay for the whole thing, but we can target them with other versions of that, and that's what we've seen as we've launched some of our newer versions of Simcyp that are targeting, you know, sort of like these specific spaces. The idea of let's get, you know, let's just expand the sort of the democratization of biosimulation. So, you know, there's a lot of things that are basically tailwinds for us, you know, that we can continue to invest in. And I think as we go forward, you'll sort of see, you know, we've got a pretty good growth rate in adoption now, and we can kind of tick that up as we go forward.
Got it. I mean, on the topic of use cases, are there maybe one or two use cases where you feel like Certara's software services would just be a great fit, but where biopharma companies just aren't seeing the value in those use cases yet or are just slow to, slow to act? Kind of low-hanging fruit use cases where you feel like that could be a near-term revenue opportunity if the decision makers at those organizations were just to speed up the decision process.
Yeah, thanks for the question. I think one of the areas that we've invested in recently, and I think is exciting, is moving into toxicology. So the toxicology market is underserved in biosimulation. There's very few products available. There's a ton of data to analyze, and there's a lot of really interesting models that we can use. And to some extent, you know, it's like an alternative use of biosimulation. So talking about, you know, how a drug interacts with the target it's supposed to hit, we're trying to simulate how it interacts with all the targets that you don't want it to hit.
I think there's a tremendous opportunity there. We've launched a product in that area called Secondary Intelligence. We've gone through a couple of iterations. It keeps getting better and better, and I think we're starting to get some interest on that, but I think there's an opportunity to, you know, to make that bigger as well.
Got it. In terms of building on the topic of areas of investment, two acquisitions that you've talked about, Vyasa, Pinnacle 21, a couple of years ago. Would just love to hear from you on how those integrations are doing. Obviously, they're at very different time points since you acquired them, but how are those assimilations of those businesses going? And are there, you know, some interesting use cases coming out of the synergies across platforms from those integrations?
Yeah, thanks for the question. So, those are two very different acquisitions, and maybe they kind of show the breadth of how we think about our business. Pinnacle 21 was the largest acquisition we did. It was over $300 million acquisition. We acquired a profitable company that's basically was growing faster than Certara and was, you know, on an EBITDA basis, even more profitable than Certara. And since they came into the company, it's done even better than that, so it's continued to grow really quickly. They have launched a new expanded version of the product that wasn't really even on the roadmap before we acquired them. And I think what's more important for us is we kept the whole team.
Really, strategically, what that enabled us to do is we took in a very accomplished software team and used it to restructure all of our software around that. The founder of Pinnacle 21 is now the CTO. He reports directly to me. And so I would regard that as, you know, we've got a, we've got an even healthier business than what we acquired, and we kept the whole team of really great people. It's been a really big success, and I think we're gonna see more as we go forward. Vyasa is a little bit of a different story. It was the only. This is maybe not what they want me to say. It's the only company we've ever acquired that wasn't profitable when we bought them.
But, you know, look, we knew we worked with this company for over a year before we bought them. We had them actually implement Vyasa in one of our products, D360, so we could see it. So we knew what they could do, and then when the acquisition happened, it happened to be about a month before everybody learned what ChatGPT was, so, so, you know, it looked very well-timed. You know, we're not in the business of being a venture funding, but, you know, to acquire that capability and integrate that in our products was just, you know, really, really compelling.
S ince they've come in, the first thing we did was we did the low-hanging fruit, so we implemented features across several of our products, which extended the existing product in a way that added AI, and we can have enough charge from that. The second thing we're doing is we're looking at the, the original prospect of AI, of Vyasa, which was to create a healthcare-oriented, large language model. So we can search unstructured data in healthcare. This is not so unlike using what you might get online from ChatGPT. O urs is focused on healthcare data. It will give you answers within from.
It will give you answers and references from within publicly available documents or potentially even internal databases, and that's drawing a lot of attention. And it's providing a lot of opportunities for us to expand in ways that really we, this time last year we weren't even thinking about.
Sure. Okay, that's helpful. Staying on the topic of business development then, what areas of investment seem interesting looking forward? Are there specific capabilities or technologies that you think would be quicker, more efficient to bring in-house through an acquisition versus building internally? How are you thinking about this capital allocation in general?
I'll start, and then I'll turn it over to, to John. But, we think about acquisitions in a couple ways. One is we have a tremendous amount of internal ideas, so we don't need to do any acquisitions, right?
There's a lot of things we can invest in internally, and this company will continue to grow. We're also in a really interesting area that is changing a lot. There's a lot of really interesting smaller companies out there that can benefit from the fact that Certara has a really wide footprint of customers. And so the way we've thought about this is, you know, we'd like to expand the percentage of revenue that we get from software. So to the extent that we can do anything significant, it would likely be in the software side.
We also benefit a lot by having a very unique, recognized set of experts in biosimulation, and sometimes we find some small services companies where we can do an acqui-hire or bolt on certain certain things, but those tend to be smaller. A s we look forward, there's a lot of areas where we can go. I've talked before about we're always interested in discovery. Right now, we tend to start working with a molecule after it's been selected, and then people want to simulate what happens in trials.
But we've always been looking at, you know, how do we, how do we get more in the discovery area so we can capture customers earlier? We've been expanding a lot because of Pinnacle 21, we've been expanding a lot in the whole biostatistics area, into things the metadata for clinical trial data and things like that. T here's probably some other, other technologies out there. I'd say we keep our eye on a lot of things. We don't feel like we ever have to do an acquisition, but when the strategy's right and the team looks right and the price looks right, we have the ability to move, and that's been successful for us, so.
A nd for capital allocation, look, we have the balance sheet to get deals done. So to Bill's point it, we don't have to do one, but, we've certainly positioned ourselves to be able to capitalize on one. We have cash, we have net leverage of less than half a turn, and we have a mindset towards software acquisitions should they make sense for us. Meanwhile, there's plenty of great ideas organically to invest in in the organization, many of which we've talked about, but that's kinda how we're thinking about it.
Switching gears a little bit, Bill, I know we've spoken before about the ex-US business and some of the dynamics that play out in different geographies with trying to drive a biosimulation business ex-US, but I'd just love to hear your latest take and perspective on what your ambitions are for Certara outside of the United States, and what are some of the efforts you might have in Europe and Asia to bolster those businesses?
So look, the strategy of Certara is to be to go wherever the drug development industry goes. A lot of times we sit here in the U.S., we think it's a, it's a U.S. game, but that's not the case, right? It's we have people 35 countries or something like that. W e're finding expansion of trials and of really good companies in a lot of the world. So we've got a heavy presence in the U.S. and also in Europe. We've been expanding in Asia as well. We have a large set of customers in Japan. They've been long-standing customers. We're starting to see a little bit in India.
I would say the one place that I've been disappointed about has been in China. A couple of years ago, I said that was my strategy to grow, and I, I guess with all that's happened in China, it's been harder than we thought. We do have a group in China, and we do sell some software there. I would , we have a presence, and I still have hopes that will be an opportunity. A t the end of the day if you're gonna develop a drug, you wanna sell it worldwide, and so we wanna be able to help customers both develop the drug and get it approved throughout the world, so.
Got it. And do you think, maybe slower than expected uptake ex-US in certain countries, has that been more related to just, kind of inertia from biopharma customers there in terms of their awareness and use of biosimulation, or, is it more localized competition or in-house solutions, or?
I don't know that it's necessarily slower. So Simcyp is purchased by 17 global regulatory agencies, and it's not just the FDA.
T he EMA and the PMDA in Japan have been notable users of it and talk about it. So I think, I'm not necessarily sure that you see a huge difference between, say, Europe and North America. I mean, most of the companies are pretty global nowadays, and there are differences in how the FDA and EMA treat certain things that we have to be aware of and help our customers with, but they're harmonizing over time. In China, there's a lot of, despite all the geopolitical issues, there's a lot of good R&D going on there.
It really doesn't make sense for anybody in the world to develop a drug and only keep it in one place. So, you know, we expect to, and, you know, I wanna keep a footprint there because at some point we are certainly gonna see, you know, a greater opportunity of things that are gonna spread around the world. And so we'll hopefully be able to serve that as well.
Got it. Great. And I think with that, we're actually at time, a little past time, so let's close it out there. Thank you both for your time. Really appreciate it. Good discussion, and hope you all found it informative. We'll go ahead and, and close out. Thanks.
Thanks, Vikram.
Thanks.