Welcome to day one of the 2025 B of A Healthcare conference. My name is Matthew Guggenbiller. I'm an analyst on the U.S. biopharma team. It's my pleasure to be joined today by John Gallagher, the CFO of Certara. Welcome, and thanks for coming. Thanks for having me, Matthew. Appreciate it. Of course. Let's jump right in. Maybe first, could you just provide an overview of Certara, sort of key takes from the one Q print, and things you're looking forward to for the end of the year? Yeah, sure. Certara is a software and services company that focuses on biosimulation or model-informed drug development. We are approximately 45% of our business is software, with the remaining piece being services. During the quarter, we performed in line with our expectations on software, which were aided by our acquisition in Q4 of Chemaxon. The services business performed in line with our expectations as well, in about the mid-single-digit growth rate, which was helped by a regulatory business that returned to growth in Q4 of last year. In Q1, also saw additional year-on-year growth. We were pleased with the quarter overall in an end- market environment that continues to be challenged, as we know. Sure. Maybe jumping into biosimulation, obviously, the focus of a lot of investor attention, especially after the recent FDA announcements that they were looking to reduce animal testing requirements. Maybe just high-level first thoughts on that announcement from the FDA, sort of your understanding of the path forward, et cetera. Yeah. I mean, Certara is very well positioned, given the announcement by the FDA, to shift away from animal testing. We have existing products and services that play really well into this directive. We are excited about the opportunity and the tailwind that it provides to the company in both the near term and over the long term as well. Specifically, what we see is one, it is a strong endorsement by a regulatory body, which helps smooth the pathway for our customers to further adopt biosimulation software and services that they are currently buying from us. It also provides an avenue to add new customers to our portfolio, generally in the tier three category. Those are some of the key opportunities. We think that we can drive incremental revenue inside of this year associated with the directive. That would show up, generally speaking, in two of our product areas. That would be in Simcyp and in QSP, which is Quantitative Systems Pharmacology, which is a biosimulation services practice that we've been building out with the help of our acquisition of Applied Biomath in 2023. That's great. I know you mentioned in the past that regulators have used your platform. Curious if you've seen any changes in the use of your platform or interaction with the agency on that end. That's right. Yeah, we do. We have a long-standing relationship with the FDA. They are a big user of our software. We hold webinars to train them on the software. We continue to have a very constructive dialogue with them going forward. Obviously, given this directive too, it only furthers the partnership that we have between the two organizations. No, there's been no change. In fact, I'd say there's additional collaboration, but definitely no change or reduction in use of Certara's biosimulation by the FDA. That's great. Maybe moving to large pharma companies, I know that you're already involved with most, if not all of them. How do you think about driving growth in this area, especially with this recent announcement? What does biosimulation do that is attractive to these companies? Where do you see it going in the next five years? Right. It is true. Each of the largest pharma companies are already our customers. The key to unlocking growth is just further penetration and adoption. The directive that we just spoke about regarding shifting away from non-animal, or away from animal testing, rather, just further enables us. Largely, historically, Certara has been clinically focused. I mentioned our acquisition of Chemaxon last year. That gets us into the discovery phase of drug development. This directive is going to help expand our footprint further into the preclinical stage. We are excited about that opportunity. The other key way that we are trying to advance the penetration and adoption with our largest customers is through our commercial model. We have been investing over the last couple of years in the sales and marketing line, which you saw in our P&L. We have built out a commercial organization that we feel really good about. They executed very well in Q1. We talked about the execution in the face of challenging end markets being a highlight on the quarter's performance. The other opportunity that we have as it relates to these largest customers is to take this commercial model and escalate the call point. Really move up the ladder within each of these organizations to have an opportunity to talk to key enterprise capital allocation decision makers, so that we can really have a discussion about the value proposition that Certara's biosimulation can offer them in drug development. Sure. Maybe moving to some of the smaller companies, what do you see as the key headwinds there for continued uptake or growth in that area? Is it sort of macro headwinds, funding, ability to spend, or what do you sort of see as the path forward? Yeah. Yeah. We call the biotechs our tier three customers. A very important part of our overall revenue achievement are these tier three customers. I mentioned our commercial team, and the execution we saw in Q1 was strong. That was thanks to a focus on the commercial model with the tier three customers. I would balance that, and we were pleased with that performance. I would balance that with the funding environment that's out there. I think everybody's well aware that the capital markets funding environment for biotechs right now is difficult. Although our tier three performance has been strong, and we said that on the call last week, we're pleased with that. We are cautious about the fact that the funding environment is challenged for the tier three customers. That is something for us to keep our eye on as we proceed through this year. Sure. Maybe sort of stepping back for a minute, do you see the impact or the continued uptake of AI-based platforms happening sort of gradually, or is it these big events like the recent announcement that will drive quick, rapid growth? Yeah. AI development is something that we've been working on for the last two years. We did an acquisition of a company called Vyasa back at the tail end of 2022. During 2023 and 2024, we've been working on putting that AI technology into Certara's existing software and service offerings. That culminated with a product offering late last year called CoAuthor, which is AI for regulatory writing. We have high hopes for that. We're generating bookings. We're generating revenue on CoAuthor. The next step, and a step we've already been working on, is how to integrate this AI technology into our other software platforms and even into the shift of quantitative systems pharmacology from purely services-based into software also. The next step is how can we accelerate some of the core biosimulation software and services that we have today, leveraging the AI technology to be able to create software or enhance the existing software that we have. Yeah. Maybe just speak to sort of your capital allocation priorities and sort of business structures to how you're prepared to make these changes in response to a very changing environment to sort of continue to drive growth. Yeah. Yeah. From a capital allocation perspective, we have been investing in the organization, even in times where the end markets are challenged, like we've had this year. We had that last year. To some degree, we had that in 2023 also. We've chosen to invest through those cycles. I talked about the commercial investment that we made. This year, the focus, now that we've built that commercial team, this year, more of the focus is on R&D investment. Some of the enhancements to AI are the R&D investments that we're making this year. In addition, we're also making investments in each of the existing software platforms to add features and functionality that will be attractive to our customers and drive sustained software growth over the long term. In this cycle of industry turbulence, we're continuing to invest. We think that's going to really help us catalyze growth into the future. When the end markets recover, we think that's a significant opportunity for us to catalyze additional growth at that point in time, too. Sure. I want to dial in on maybe one specific. I know that you launched the Non-Animal Navigator recently. Maybe speak to sort of how that was developed. Was it the culmination of a lot of internal systems coming together? Was there sort of novel innovations that happened? Maybe speak through the development process there. Yes. Yeah. Non-Animal Navigator, we launched right on the heels of the FDA announcement of the shift away from animal testing. We're excited about this opportunity. Again, as I mentioned earlier, we think there's an opportunity in front of us to drive incremental revenue inside of this year associated with Simcyp, associated with QSP. Really, the way to help do that is we've created this offering called Non-Animal Navigator, which effectively helps translate for our customers the existing platforms that I mentioned and how those can be used in these specific use cases to help shift away from animal testing. We're excited about that opportunity. We see that. Two days after we launched Non-Animal Navigator, we held a webinar for customers. We had hundreds of customers join the webinar to learn about the product and learn about how they could begin to shift their business toward modeling and model-informed drug development and away from animal testing. That was really the first stage. Even last week, we held an annual customer conference that we call Certainty. Last week, we had 250 customers come together in one place for a two-day conference. These were customers across all three of our customer tiers. As you can imagine, there was a lot of conversation about Non-Animal Navigator, about the shift in the FDA directive, and how our products and services can help them change their priorities as it comes to drug development. Sure. Maybe on that point, have you seen most of the interaction with Non-Animal Navigator from tier one versus tier three companies, sort of a mix of all of them? Is it applicable to all of them, or do you see this as sort of predominantly focused on capturing one tier? Yeah. No, it's across all three tiers. The engagement that we had with our customers, even just last week, was across tiers one, two, and three. The help that we can offer to customers navigating this new directive is applicable really to each of the customers. Sure. Maybe switching to Chemaxon now. I know that was a recent acquisition that adds some capability that you did not have before. Maybe speak to what that capability is and if you are sort of looking to go further in that area of maybe preclinical drug discovery versus your sort of historical clinical precedent. Yeah. Yeah, that's right, Matthew. Historically, Certara's footprint in the drug development cycle was predominantly in the clinical phases. Although we did have a small presence in discovery with our D360 product, adding Chemaxon to the Certara portfolio is an important step to really expand our footprint beyond clinical and into discovery, also. We are very excited about bringing Chemaxon into the Certara family. The integration has been going very well. The business has performed ahead of our expectations, as you've seen in the Q4 and now the Q1 results. I'd say that what we're focused on right now from an integration perspective is some of the commercial opportunity that's in front of us in introducing the Chemaxon products to Certara's many, many customers that we have. That's a significant opportunity. The other opportunity that we have associated with Chemaxon is bringing existing products together. I mentioned Certara had had D360 in the past. Selling that independent from Chemaxon growth was somewhat limited in that respect. Having the Chemaxon offering and combining Chemaxon offerings with D360 is a powerful combination for us to drive additional growth on top of the initiatives that we're working on with the sales team. I'd say that it's been going really well. It puts Certara's footprint as an expansion into discovery. Everything that we just talked about, related to the FDA directive away from animal testing, expands our footprint even further into the preclinical, where we had done some work, but this is really going to advance our opportunity to do a whole lot more work in that phase of drug development. Sure. Maybe just speaking to the synergy between the preclinical and the clinical side, how do you see that working from a user basis? Do you have an example of customers that have been using both preclinical and clinical programs and the success they've seen? Yeah. The opportunity here is that where historically there's been animal testing, then there's an opportunity to use modeling. As I mentioned, our footprint in preclinical had been somewhat limited pre-announcement. Now that we've got an opportunity in front of us to expand that footprint, we've got discovery also. I think Certara is very well positioned to be able to gain a larger share of wallet as we look at the customer base, having product or service offerings in discovery, preclinical, the clinical phases, all the way through submission with our Pinnacle 21 software product. That helps change the conversation and helps change the use cases that some of these customers can see because these are different populations inside of the very largest organization. These are different populations and departments that are focused on different areas that may or may not have had exposure to us in the past. It is a nice opportunity for Certara. Yeah. That's helpful. Maybe thinking about those customers who are sort of potentially new to Certara, I know the FDA announcement mentioned sort of organoids, organ-on-a-chip, as well as biosimulation. Maybe speak to sort of why you view biosimulation as potentially the best out of those options or what advantages that has versus organ-on-a-chip, et cetera. Yeah. So the advantage that biosimulation has is the fact that it's been around. There's a long track record in history, including the data and the clinical studies associated with biosimulation, that proves the efficacy of the modeling as a good replacement. Now, that's not to say organ-on-a-chip, I think, does present an interesting opportunity. It's just an earlier- stage technology and use case that we're certainly taking a look at and trying to understand better, and may have some very good use cases as it relates to toxicology. I think that the larger opportunity here is with the proven track record and the data associated with biosimulation from many years of use and, importantly, use by the regulator also. We've talked a lot about the FDA. We talked about their use of our software. That's also an important pathway for the adoption of customers and their use of biosimulation. Yeah. So maybe towards that point, what do you see as needed for even wider spread uptake of biosimulation? Is it sort of the cumulative approval of drugs that were developed using this technology, or is it sort of regulator interaction, sort of both? Those two dynamics play hand in hand. What we see as the long-term driver of growth of biosimulation, setting aside some of the industry dynamics that are headwinds in the present moment, is the adoption and penetration of biosimulation, meaning just more utilization of technology and software, and the use of drug development than is used today. One of the key opportunities to be able to open up that adoption and accelerate it is for our customers to feel very comfortable that, as they use the technology, they adopt it in their drug development programs, that it will be accepted by the regulator. That is why guidances by the FDA, including the directive that we just saw recently, are very important to smooth the pathway for adoption of biosimulation. That's what gets us very excited about the recent, very specific mentioning of modeling in drug development and in the recent directive. Sure. Looking at the drug development process from preclinical all the way to approval and potential launch, a lot of the issues that many investors have are the time it takes to get to a potential launch, the quality of assets. It's something like 1 in 12,500 preclinical candidates end up actually being approved. Where do you see biosimulation coming in in improving the process? Is it the speed to get to approval? Is it the quality of assets? Is it the cost that's associated with running animal studies preclinically, sort of all of them? Yeah. The core value proposition for biosimulation is using technology to save time and save money in the drug development process. While that, obviously, one of the key ways that that happens is accelerating successful drugs through the development cycle. The other key important avenue of learning that we have in this process is the failure of drugs too. The sooner that you can understand if there's going to be a failure, and biosimulation has been in place long enough now that there's many instances that have informed the models into the future, that even understanding the failure points is a key point in the overall development and how you can accelerate drug development in the future. Obviously, the successes and the speed to success is important, but the speed to failure is another key metric that we think biosimulation can really help drive efficiencies in saving that time and saving that money that otherwise would have been spent on something that may or may not have worked. Yeah. Maybe speaking to that, I know a lot of people focus on the data behind these models to sort of understand the amount of data, what these models can and can't predict, the probability of success, excuse me. Maybe speak to the data that's driving your model, what you're using, and sort of what you've seen be most beneficial. Is it toxicology? Is it sort of preclinical properties, PK, PD, et cetera? Right. So again, historically for Certara, the key data that we had was clinical. If you think about, and we have many, many years of that data that helped inform the models that have evolved into what they are today, which is the most sophisticated models in the industry. That is not to say that that data can obviously be transferred and help inform preclinical uses too. That is why we think that the products that we are offering today, meaning, again, QSP services as well as Simcyp, PBPK services, all are helpful in shifting from a clinical focus into a preclinical focus. That's helpful. Maybe switching to R&D. I know this is a big focus point for you guys, a lot of time, effort, and money spent in this. What are the biggest pain points you're hearing from customers in terms of what you're thinking about for potential innovation in R&D? Yeah. Yeah. Our focus on R&D is how we can provide features and functionality on our software platforms that are going to help drive efficiencies at the customers. A good case in point for that one is on the Phoenix software platform for us. We are in the process right now of transitioning Phoenix from an on-premise version that the customer hosts to a Phoenix-hosted or a Phoenix cloud version that we will host for them. That is a significant value to the customer in the sense that they do not have to host the software. That is something that they are willing to pay for, also. It is a good opportunity for Certara to transition and help hit a key pain point at our customers while driving additional growth and value at Certara. Maybe when do you expect to see that shift sort of fully realized, maybe in revenues? Right. We are doing that transition this year, but we view that as a multi-year adoption cycle. If you think about our software, generally speaking, most of our software is on an annual renewal. As these renewals pop up, which is throughout each of the quarters of the year, we will be seeking to do that transition. We think that it is a multi-year kind of transition from on-premise to the cloud. That's helpful. Maybe taking a step back, I know you guys have been active on M&A in the past. Balance sheet looks healthy. Any thoughts on what you're pursuing here if you're continuing to pursue M&A activity? Yeah. Yeah. That is right. We have been acquisitive. The balance sheet is in good shape. We have just recently gotten approval and executed partially on a share repurchase authorization, which in our minds just provides another avenue of capital allocation, but does not take our eye off of what we think is sort of the core capital allocation vector for us, which continues to be M&A and searching for good candidates to add to our portfolio, just like we did with Chemaxon last year. We do look towards software as a key area as we continue to drive the mix of software. I said at the beginning of the call today that the mix of software at Q1 was about 45%. We think that by the time we get to the end of this year, that will be 50%. We are continuing to drive a higher proportion of our overall revenue achievement in software. That is a key component. Although we have now added another avenue for capital allocation with share repurchase, and we executed some against that, and we think that is a good use of some of the cash, the key focus continues and will continue to be a focus on M&A opportunities. Gotcha. Just double-clicking on that share buyback. I know that was before the FDA announcement, I believe. Is this sort of the strategy moving forward, at least in some portion, to continue the share buybacks? We have to evaluate it in the, just like I was saying, we have to evaluate it in the context of what all of the opportunities are, and what is the value capture that we're going to get on each dollar that we're allocating out. It is good to have another avenue for capital allocation. We think that's important, especially since we're a company that generates cash. We have cash on the balance sheet, and we want to deploy that cash meaningfully each and every year. Share repurchase is one avenue. As I mentioned, I think we would balance that, and you've seen us balance that with acquisitions as well. That's helpful. Maybe last question, as we think forward into 2025, obviously, things are changing all the time, but maybe provide sort of an overview of your expectations for the rest of 2025, what you're looking forward to to drive growth. Yeah. We talked a lot about the opportunity in front of us. We're very excited about that, optimistic about the incremental revenue we can drive from this near-term opportunity. The counterbalance to that, of course, is that the end market environment continues to be challenged. That's not really a surprise to us. We had contemplated in our guidance that 2025 end markets would be similar to what we saw in 2024. That's pretty much how it's playing out. We had challenges with tier one customers last year, with some slowness, some portfolio reprioritization. That happened last year, and that's happened again this year. That's playing out in line. I'd say in the tier three customers, so the biotechs, last year, although the funding environment was a little better last year, I think we're seeing that show up in our recent tier three customer performance results. This year, the funding environment appears to be a little bit worse than what we saw last year. Net net, it's sort of playing out in line with our expectations and in line with the way that we had guided the year. That's helpful. Unfortunately, I think we're coming up on time, but I want to thank John for the very insightful conversation and look forward to following the story for the rest of the year. Thank you, Matthew. Appreciate it. Yep.