Certara, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A leading provider of biosimulation software and technology, Certara helps pharmaceutical and biotech companies accelerate their drug discovery and development processes through the use of model-informed drug development (MIDD).

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Certara, Inc. (CERT) is a global leader in model-informed drug development, or MIDD, a field that combines mathematical modeling and simulation to optimize drug discovery and development. They provide software, technology, and services that help biotech and pharma companies to predict and simulate the performance of their drugs in human bodies. These solutions help speed up clinical trials, lower development costs, and increase the likelihood of drug approval.

Revenue Streams:

Software: Subscription and license fees for their proprietary software platforms like Simcyp, Phoenix, and other offerings, used for drug modeling, analysis and development.
Services: Revenues derived from consulting, training and implementation of their proprietary software, and other support services.

Industry Landscape and Trends:

The pharmaceutical industry is increasingly relying on MIDD, fueled by:

Rising development costs and stringent regulatory requirements.
A desire for faster and more efficient clinical trials.
The increasing complexity of biologic drugs (large molecule drugs) with unpredictable human response.
Increasing use of data and Artificial intelligence in drug discovery
FDA has accepted model-informed drug development(MIDD) methods. This creates a large and expanding addressable market for Certara’s services and offerings. Competition, however, remains intense with various established players, software startups, and some in-house teams of large pharmaceutical companies also providing similar services.

The industry is extremely important and necessary. It saves money for pharmaceutical companies. They get answers faster and are able to make decisions faster, saving time and reducing time to market.

Competitive Landscape and Differentiation:

Proprietary Platform: Certara’s proprietary platform offers robust and versatile software options for various tasks including regulatory submissions. It includes solutions such as biosimulation, regulatory software, and model informed drug development, all in one offering.
Expertise and Experience: They boast a long history and deep knowledge of biopharmaceutical R&D, and have deep understanding of regulatory requirements, helping clients with approvals from regulatory authorities like FDA, EMA, PMDA, etc. They also employ leading mathematicians and biomedical engineers, which are a limited resource.
Established Reputation and Customer Base: With their high customer retention rate, and reputation for accurate and complete analytics, makes the company extremely valuable to existing and new clients.
Comprehensive Service Offerings: The company has a mix of software, consulting, and analytics services, creating a stickiness and a complete package of solutions for companies.

While there are competitors, Certara’s specialized software coupled with experience in regulatory compliance is their key differentiator. Other competitors might not be present in all aspects of drug discovery and development.

Financial Analysis:

Recent 10-Q report indicates a mixed financial picture for the three and nine months ended September 30, 2023:

Revenues: Total revenues increased by 11% and 7% for the three and nine months ended September 30, 2023, compared to the same period in 2022. The growth is primarily driven by the strong demand for their software products, along with continued expansion and adding new customers and the addition of companies through acquisitions. This clearly shows revenue growth, though some of it coming from acquisitions.
Cost of Revenues: Increased by 10% for the three months and by 12% for the nine months ended Sept 30 2023 indicating similar growth in input costs as well.
Sales and Marketing: Increased by 47% and 17%, for the respective periods, indicating increase in demand and that the company is trying to expand.
Research and Development Expenses: increased by 12% and 25%, respectively, during the mentioned periods, this indicates more investment into future growth and product development, which is a positive.
General and Administrative Expenses: Increased by 27% and 23%, respectively, during the same period, this indicates more costs in running the company, probably because of additional employees.
Net Loss: The company recorded a net loss of $13.3 million and $52.1 million for the three and nine months respectively. The net loss was partially due to goodwill impairment of 47 million during the three months. This is a loss, but that is mostly related to noncash accounting principles.
Adjusted EBITDA: Adjusted EBITDA increased significantly during the reported periods, up 39% for the 3 months and 36% for the 9 months. So, though the company is currently not profitable, it is highly profitable if you exclude noncash items.
Adjusted diluted earnings per share: Diluted EPS came in as ($0.01) and $0.11 for the respective periods, so the company is getting close to profitability.
Cash Flow: They have also generated positive cash flow during the period, providing them with flexibility.

Overall, recent numbers reflect revenue growth, high expenses into R&D and marketing, increased noncash charges, while they have become more profitable at an EBITDA and earnings level. The company is growing, but some of its past acquisitions are impacting the profit levels.

Moat Assessment:

Intangible assets: A powerful moat that is built using patents, data and regulatory licenses.
Switching costs: the company integrates in with workflows in pharmaceutical companies and so their software products are usually very difficult and costly to replace because of the cost of retraining and data transfer. Based on these two factors the company has a narrow economic moat but given the current market climate and competition a wide moat is hard to justify. Rating: 2/5

Legitimate Risks to the Moat and Business:

Competition: There are a lot of similar companies that offer similar services, therefore competition for clients is fierce. The pharmaceutical industry is also highly profitable, and so it attracts a lot of new competition. New entrants can easily make in-roads in the market if new, innovative ways of drug discovery and development are made, which is a big risk for Certara.
Technological Obsolescence: the field of software and technology is always rapidly changing. If they don’t stay updated, they may get left behind.
Acquisition Risk: Although acquisitions have contributed to value creation, if the company overspends on such acquisitions and struggles to properly integrate those, the value can be destroyed.
Regulatory Changes: They have to be compliant to regulations for FDA and other agencies. Changes in these regulations can make their software products obsolete or can create significant costs in compliance.
Financial Risks: The company has very high debt levels. High interest rates could harm the profitability of the company.

Business Resilience:

The companies they serve are some of the largest biotech and pharmaceutical companies in the world. These companies have the ability to push through economic downturns, making Certara’s business less likely to be severely impacted by external factors.
It is more difficult to cut drug discovery and drug development R&D spending as most of the pharmaceutical companies need new drugs in their pipeline. Their products are essential for this industry, making them essential to their customer base.
By maintaining existing client base with excellent service.
Increasing focus on recurring revenue software subscriptions
By diversifying into various industries, not just pharmaceutical companies

Understandability:

The business model itself is quite straight forward, they provide software and services to pharmaceutical companies to help in drug discovery and development, but the financial part is hard to fully grasp since they do a lot of acquisitions and use lots of complex accounting principles. Rating: 3 / 5

Balance Sheet Health:

The company’s balance sheet is okay and mostly safe, mostly because of the cash reserve they have, but their long-term debt is fairly high.

Debt: Their long-term debt of more than $900 million which is concerning. They have a cash to long-term debt ratio of only 0.3, which is very low.
Cash: Cash and cash equivalents are around $240 million, which gives them a good cushion.
Net assets: Total assets are roughly $1.4 billion, compared to $1.26 billion in liabilities.

Overall, the company has high debt with decent amount of cash reserves, making the balance sheet only healthy on surface. Rating: 4 / 5