Certara at Barclays Healthcare: Strategic Shift Toward Biosimulation

On Wednesday, 12 March 2025, Certara Inc. (NASDAQ: CERT) presented at the Barclays 27th Annual Global Healthcare Conference. The company highlighted its strategic focus on biosimulation, driven by recent acquisitions and robust Q4 bookings. However, it also acknowledged challenges, such as slower decision-making among large pharma clients. Certara is investing in R&D, particularly in cloud and AI technologies, to support future growth.

Key Takeaways

• Certara’s Q4 bookings were strong, bolstered by acquisitions and seasonality.
• The company is shifting strategically toward biosimulation, with a focus on AI and cloud integration.
• Slower decision-making by large pharma clients impacted the Phoenix product line.
• Certara is investing in R&D, expecting a margin contraction in 2025 due to these investments.
• The company remains open to opportunistic M&A deals, especially in software.

Financial Results

• Q4 bookings were robust, driven by acquisitions and seasonal factors.
• Certara’s 2024 adjusted EBITDA margin was 32%, meeting expectations.
• Revenue from the regulatory business reached $50 million, with a margin profile between 20% and 30%.
• A 70 basis point margin contraction is anticipated in 2025 due to R&D investments and Chemaxon integration.
• The integration of Chemaxon is expected to align its profitability with Certara’s adjusted EBITDA margin by the end of 2025.

Operational Updates

• A strategic review of the regulatory business led to reduced capacity and higher gross margins in late 2024.
• Decision-making among Tier 1 customers slowed due to portfolio prioritization, affecting Phoenix renewals.
• SIMSIP continued to demonstrate strong growth, while Chemaxon performed well in Q4.
• Investments are being made to unify technology architecture and transition to cloud-based solutions.
• AI investments focus on regulatory writing and clinical applications within SimSIP.

Future Outlook

• Certara’s 2025 guidance assumes market conditions similar to 2024.
• The company aims for mid-teens growth, contingent on successful investments and market improvements.
• R&D investments are expected to drive growth, with a focus on cloud unification and AI.
• Certara is open to software M&A deals that complement its existing pillars.

Q&A Highlights

• Discussions centered on demand from large pharma versus biotech, cloud integration, AI, and M&A.
• Questions were raised about the slow recovery and pricing strategies.
• There was a focus on the unified cloud strategy and initial feedback.

In conclusion, Certara’s comprehensive strategy and investments in technology aim to drive growth and adapt to market challenges. For a deeper understanding, readers are encouraged to refer to the full transcript below.

Full transcript - Barclays 27th Annual Global Healthcare Conference:

Luke, Interviewer: From Certara, the limited CFO, I guess, relatively speaking.

Unidentified speaker, CFO, Certara: So Thanks for having me, Luke.

Luke, Interviewer: Yes. 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.

Unidentified speaker, CFO, Certara: Yes, sure. So to start off, Q4, we had solid results as we look at the bookings. We were aided by the acquisitions that we’ve done, not only of Chemaxon in October of twenty twenty four, but also some of the acquisitions that we had done in the tail end of 2023, which we hadn’t lapped quite yet. So 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. And then we ended the year with a 32% adjusted EBITDA margin, which was right in line with our expectations on the year.

And of course, you probably recall that we had about halfway through last year, we had taken some actions to drive that 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.

Luke, Interviewer: All right. And then just a little bit on that because we before we get into the demand environment stuff, but talk about because this is largely a services business or largely software business, but even at your services piece has a large software component. But so where were you able to drive that productivity improvement among your services component? And you’re talking about taking capacity out. What was that?

Unidentified speaker, CFO, Certara: Well, a lot of that was due to the regulatory business. So the regulatory business in Q3, we had indicated that we were doing a strategic review of that business. And that’s mainly because the core focus of the company at this point is on biosimulation. And as we were looking at performance of services over the last, not just in the middle of last year, but really over the last year plus then we were seeing a sustained overcapacity and 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.

Luke, Interviewer: And on the strategic view on some of that on the regulatory piece, how much of the incremental margin driver would that be once that’s totally

Unidentified speaker, CFO, Certara: gone? We didn’t quantify what the margin the potential for margin accretion would be if we do decide to move forward with divesting reg. But what we did say is that the reg business is has a profitability profile that is attractive. It’s a $20,000,000 it’s a $50,000,000 business in revenue. We said that the margin profile is 20% to 30%.

And so that’s certainly an attractive business from a profitability standpoint. Got you. And then from

Luke, Interviewer: 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?

Unidentified speaker, CFO, Certara: Yes. Yes. We saw so as we were exiting the year, we saw some of what you’ve heard everybody say, I’m sure is the we’ve seen some slowness in Tier one. So Tier one is the big pharma companies that are our customers and almost all of them are our customers and we’re seeing some slowness in decision making, which is driving some slowness to bookings. We’re seeing, we believe a lot of that as 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.

And for us that translated we made some commentary on the call that translated to an impact on our Phoenix product line where we

Luke, Interviewer: saw some slower renewals and some reduced seat licenses. That makes sense. I mean, it’s software replacing seats and if they’re restructuring, are you seeing in the Exactly.

Unidentified speaker, CFO, Certara: Now the flip side to that is we’ve seen continued and sustained strength in SIMSIP. So we’ve been very pleased with the continued strong growth from SIMSIP. 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. So and some of that is due to seasonality in Chemexon, but some of it’s over performance too.

So they’re coming out of the gate together with Certara very strong. So we’re happy about that. You asked me too about the biotechs. And so we define them as sort of Tier three customers would be biotechs. And 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. But 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 there’s what we haven’t seen is a full recovery in Tier three and we’re watching closely what the funding environment looks like in 2025.

Luke, Interviewer: And as you think about the different kind of debundled 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 and this is like,

Unidentified speaker, CFO, Certara: all right, we’re going to

Luke, Interviewer: buy this first and then we’ll go and think about these other offerings later or just pretty broad based? Yes.

Unidentified speaker, CFO, Certara: We’re I mean, the we now have four key pillars in software. So it’s the it’s SimSIP, which we talked a bit about. We talked about Phoenix, which although impact from Tier one customers still obviously growing this year. And then Pinnacle, which has been a strong contributor. Now we’re adding Chemexon to that.

Those are the four key pillars of the software business. And I wouldn’t say there’s any one of them that’s really the start. Our commercial team is attacking each of them and each customer’s needs are different. And now that we’ve added Chemexon to the portfolio, we now have a presence across drug development including in discovery where our footprint had been smaller previously. Right.

Luke, Interviewer: And on that discovery piece that’s been relatively that’s been the really most soft part of for the last couple of years is the restructures that come through. Maxon really exceeded expectations there in 4Q. So how much of that is just being under your umbrella and having a larger commercial work pushing it versus actually you started to see like that drug discovery market start to bottom and come back?

Unidentified speaker, CFO, Certara: Yes. To be clear, we haven’t seen and nor does our 2025 guidance contemplate an inflection point during this year. So we are assuming the end markets whether it be Tier one customers or Tier three customers are 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 Chemexon, so Chemexon, what we’re seeing is also a seasonally it has a seasonally strong Q4 much like the remainder of Certara, which usually has a strong Q4 also. So 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.

Luke, Interviewer: Okay. And then on as you talked about the four pillars and you 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 our some early wins and early feedback and demand there?

Unidentified speaker, CFO, Certara: Yes, yes, yes. That’s a good question, because we in our guidance, we talked about the investment in R and D that we’re making. And so there’s three key areas of R and 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. And so that’s one area of the R and 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. And 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. So 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.

So we want to continue from the acquisition we did at Viasa 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.

And then the third area of investment that we’re making in R and D is on new products and features within our existing platforms. And so we think it’s very important as you think about Phoenix, SIMSIP and Pinnacle that we’re putting new functionality, new features that are attractive to our customers and we’re doing that inside of this year and next year.

Luke, Interviewer: And following up there on the AI, I mean, technology adoption within pharma and the drug development space has always been very slow. And you’re already offering simulation software and providing some of these leading edge tools. And now you’re roll on AI. So where do you think like 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 don’t even need to use humans anymore, right? I mean, that’s like what you have the two ends of the spectrum there.

Unidentified speaker, CFO, Certara: Right, right. Yes. That end of the spectrum is not where Certara plays as you know. But what we see so I mentioned co author. Obviously, we’re excited about that.

That was certainly from the lowest hanging fruit was using generative AI to and apply that to a regulatory writing practice, which creates a ton of efficiency and creating drafts and revising drafts in preparation for submitting to the FDA or other regulatory bodies. So that’s the first piece of it already on the market, already selling. So we’re pleased about that. As you look forward and how does AI further get rolled out under the context of what Certara does, And you can start thinking about clinical applications as it relates to say for example, SimSIP. So SimSIP is a product that it’s highly complex software and with a lot of data and it’s been in place for a long time.

So the aggregated accumulated data and learnings from SIMSIP over time and automating and gaining speed to understanding and gaining speed around modeling capabilities for SIMSIP is one

Luke, Interviewer: of the next phases that we’re focused on for AI. And then from the regulatory writing, this is 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 as 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?

Unidentified speaker, CFO, Certara: Yes. Yes. So, we’re approaching AI from both angles actually. It’s a good question, because we’re selling co author as I mentioned and we are paying customers for it. In tandem with that, we’re also using the AI technology on our own 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.

So that is another key use case as we think about co author.

Luke, Interviewer: Okay. And then continuing on the pricing dynamic, just you guys have been able to get decent pricing each year. How’s the with the tighter budgetary environment among large pharma and especially among biotechs, is there strapped for cash as well. How has the conversations been going from a pricing perspective? And is this kind of the new normal that we should be rebasing on?

I’m just thinking long term.

Unidentified speaker, CFO, Certara: Right. Yes. I mean, we 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. So and 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

Luke, Interviewer: last two years. Okay. And then 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 Maxon running coming on board.

You’re bringing things on to Unified. So talk about the different buckets there organically of what’s going on. You’re not able to get as much pricing. You might have a little bit more wage inflation. So talk about what you’re seeing there from a margin perspective and this is where we the jump off point we should expect things to get approved from here or kind of flattish over the next year or two?

Unidentified speaker, CFO, Certara: Right. Well, certainly for 2025, it is a year of investment as you said, Luke. We are focusing the investment in 2025 on R and D and I explained the three buckets, the 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. And 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. And so as we focus on R and D then that’s an area that is impacting the margin. As you saw, our guidance for the adjusted EBITDA margin was 30% to 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.

And then about 50 basis points of it is from Chemexon. And we’ve said a big piece of the a big piece of the integration activity with Chemexon is getting their profitability profile up to Certara’s adjusted EBITDA margin. And we’re committed to getting to that spot as we exit 2025. So we’re on good pace so far.

Luke, Interviewer: Okay. And then so after that it should be back to how things work consistently kind of?

Unidentified speaker, CFO, Certara: It will be 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. And 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 ’26. And as we as that happens, then obviously our revenue growth would increase and it better positions us for margin expansion into the future.

Luke, Interviewer: Yes. You’re going to hit that level. Right. 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 and A on top. But as we’re thinking past 25% and your kind of your exit rate, it still implies you’re going to need to step up there to get to that mid teens.

Like how do you think about the momentum that you’re going to build? And then from a bookings visibility perspective, how that kind of paces out through ’26?

Unidentified speaker, CFO, Certara: Yes. So 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 and marketing R and D and that’s going to catalyze growth. And the other is the end market. So we have seen now on a prolonged basis pretty difficult end markets, whether it be big biopharmas, whether it be biotechs.

And so as that dynamic resolves and presumably goes back to where we’ve seen historic levels. And if you take both of those together, we see we don’t see any reason why Certara wouldn’t be growing in the mid teens in that kind of an environment.

Luke, Interviewer: And I guess just from a philosophical or however you want to approach it, but right now it just feels like that this has become the new normal among biopharma. And yes, we will eventually get back to that era of continued and strong investment. So when you’re thinking about that LRP like over the next three years, should we be thinking about your base business growing in this like high singles, low doubles as just kind of, all right, well, if things don’t get that much better and we don’t hit that inflection in the biotech side and biopharma stays tighter for longer, like is that a more appropriate way to think about your business growth in the out years as well? Or because 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. Like instead of having that cycle of well, things aren’t playing out and you’re having to pull some numbers down, down, is it more prudent for us to think about this as kind of like a high singles, low double digit over the next couple of years and we’ll get back to that mid teens when things unlock?

Unidentified speaker, CFO, Certara: Yes. I mean, we’re certainly doing our part to drive the growth in the meantime. And Q4 is a good example of that at difficult end markets in Q4 for sure. Yet, we posted a solid quarter in the face of that and that’s the execution from the commercial team that we’ve been growing and investing and putting in place. So I don’t disagree with your point.

I think we can drive some level of growth despite the end markets, but to get all the way there, which I think is what you were saying, to get all the way there to the back to the mid teens, we would need the end markets to aid us as well. Yes.

Luke, Interviewer: All right. That’s fair. And then lastly here, just kind of wrapping things up these last couple of minutes, just 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 with the Tier two customer. Walk through what’s going on there and the conversations you’re having like what kind of customer that Tier two ultimately fits and then from an outlook perspective with the recovery or trough?

Unidentified speaker, CFO, Certara: Yes. So the way we define the so Tier one customers are customers whose annual revenue is $5,000,000,000 or more. That’s the big pharma. Tier three is less than $100,000,000 of revenue. And then so the Tier 2s are in between that.

And so they’re obviously deep into commercialization and the larger ones are nearing the edge of being a big biopharma company. And you’re right that was on the services side for Q4 that was the one area where we saw a decline and in bookings at least on that quarter. And that was mainly driven by the regulatory business. Okay. So the our BioSim, our BioSim services business during the quarter grew well, but it was more than offset by weakness in the regulatory business in the Tier two category guide.

Now one thing that but to add on to that point, Tier one alternatively for regulatory actually returned the regulatory business to growth in Q4. So it was the first time during 2024 that we’d posted year on year growth in bookings. So as you think about the regulatory business, it impacted the company’s Tier two performance as you pointed out. But when you think about regulatory and the performance on the quarter, it was actually quite good because the first quarter that returned to growth not only in bookings, but also in revenue. But that was centered mainly in Tier one customers.

And do

Luke, Interviewer: you typically see it kind of as a Tier one started and then it kind of flows down like Tier two and then Tier three? So as you think about from farmer spend and going down to the small biotech?

Unidentified speaker, CFO, Certara: 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. Okay. And so I think that rather than it necessarily trickling down, I think we’re seeing better performance in the Tier one category in regulatory. And 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.

Luke, Interviewer: Got you. All right. And then lastly here, M and 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 four legs of the stool. And is it just more about bolt ons around those? Or do you see maybe a fifth leg to I don’t even know if that’s a stool anyway that might be a table or

Unidentified speaker, CFO, Certara: It’s a table then, right? We think that so we’ve been happy with the investments that we’ve made and the choices that we made with M and A. And 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.

Luke, Interviewer: Perfect. Thank you. Appreciate the call.

Unidentified speaker, CFO, Certara: Thanks for having me. Yes.

Luke, Interviewer: You got it. Thanks again. Thanks.

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