Certara(US:CERT)2024-02-28 16:00Part I Business Certara provides biosimulation technology and solutions for Model-Informed Drug Development (MIDD) to enhance drug development success and reduce costs Our Company and Solutions Certara offers biosimulation software like Simcyp and Phoenix, integrates AI, and provides technology-enabled services for drug development - Certara is a leading provider of biosimulation technology and solutions for Model-Informed Drug Development (MIDD), aiming to increase success rates and decrease costs in biopharmaceutical R&D37 - Since 2014, customers using Certara's solutions have received over 90% of all new drug approvals by the US FDA, working with nearly 2,400 life sciences companies and academic institutions52 - Key software platforms include the Simcyp Simulator for mechanistic modeling, Phoenix™ PK/PD suite for empirical modeling, and Pinnacle 21 for clinical data automation506265 - The company has incorporated AI and machine learning, including the launch of Certara.AI for deploying life science-specific Generative Pre-Trained Transformers (GPTs)4448 Our Markets and Growth Strategy Certara operates in expanding biosimulation, regulatory science, and market access sectors, pursuing growth through technology, customer expansion, global reach, and acquisitions Addressable Markets (2023 Estimates) | Market | Estimated Size (2023) | Annual Growth Rate | | :--- | :--- | :--- | | Biosimulation | $3.4 billion | 17% | | Regulatory Science | $7.6 billion | 8% | | Market Access | $1.4 billion | 12% | - The company's growth strategy focuses on advancing technology, expanding within its customer base, growing globally, and scaling through acquisitions939597102 - Customers with annual revenue of $100,000 or more increased 5.1% to 389 in 2023, with an aggregate software renewal rate of 88%98 - Certara has completed 20 strategic acquisitions since 2013, including Formedix, Applied Biomath, and Vyasa in 2023101 Customers, Competition, and Intellectual Property Certara serves diverse biopharma and academic clients, competes in a fragmented market, and protects its innovations via patents, copyrights, and trade secrets - Customers include nearly 2,400 biopharmaceutical companies and academic institutions across 66 countries, with 23 global regulatory authorities also licensing Certara's software104 - The market is competitive and fragmented, with key competitors including Mathworks, Ansys, Simulations Plus, ICON's NONMEM, and open-source solutions110112 - As of December 31, 2023, Certara's patent portfolio includes 27 issued patents and 12 pending applications, supplemented by copyright and trade secret protections115117 Human Capital and Government Regulation Certara employs 1,391 professionals, including 433 PhDs, and adheres to biopharmaceutical, data privacy, cybersecurity, and anti-corruption regulations - As of December 31, 2023, the company employed 1,391 professionals across 28 countries, with 433 holding PhDs119 - The company's operations comply with biopharmaceutical regulations like Good Laboratory Practices (GLP) and Good Clinical Practices (GCP), supporting customer regulatory applications121 - Certara is subject to stringent data privacy and cybersecurity laws, including HIPAA in the U.S. and GDPR in the EEA, due to handling sensitive data123127 - The company is subject to anti-corruption laws such as the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act of 2010131 Risk Factors The company faces risks from market competition, R&D spending dependency, operational challenges, global operations, goodwill impairment, cybersecurity, data privacy, and significant indebtedness - Industry Risks: The company faces risks from decelerating acceptance of model-informed biopharmaceutical discovery, intense competition, regulatory changes, and reduced customer R&D spending606610613615 - Business & Operational Risks: Key risks include market entry and customer expansion, dependence on key personnel, potential software defects (especially with AI), and customer license renewals563570626629 - IT, IP & Data Privacy Risks: Risks include reliance on third-party cloud infrastructure, potential security breaches, and non-compliance with privacy and cybersecurity laws like GDPR and HIPAA795805810 - Financial & Indebtedness Risks: Significant debt and restrictive covenants may adversely affect financial condition and strategy, alongside goodwill impairment risk, which incurred a $47.0 million charge in Q3 2023859867874 Cybersecurity Certara manages cybersecurity risks through a program based on NIST and ISO standards, overseen by the Board, with no material incidents reported - The company's cybersecurity risk management adheres to industry best practices like NIST 800-53, ISO 27001, and CIS Top 20, emphasizing proactive monitoring164166 - Cybersecurity governance is overseen by the Board of Directors and Audit Committee, with the Security and Privacy Program Office (SPPO) managing program design and implementation171172 - As of the report date, no cybersecurity incidents have had or are reasonably likely to have a material impact on the company's business, operations, or financial condition170 Properties As of December 31, 2023, Certara leased 36 offices across 16 countries, including its Princeton, NJ headquarters, deemed adequate for operations Material Operating Locations (as of Dec 31, 2023) | Location | Approx. Square Footage | Lease Expiration | | :--- | :--- | :--- | | Wilmington, Delaware, USA | 18,250 | Feb 28, 2027 | | Princeton, New Jersey, USA | 17,560 | Jun 30, 2025 | | Sheffield, UK | 13,910 | Jan 28, 2028 | | Raleigh, North Carolina, USA | 11,250 | Jan 31, 2028 | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Certara's common stock trades on Nasdaq under "CERT"; no dividends are expected as earnings will be reinvested, and 5,462 shares were purchased in Q4 2023 for tax payments - The company's common stock has been listed on The Nasdaq Global Select Market under the symbol "CERT" since December 11, 2020183 - The company does not anticipate declaring dividends on its common stock, planning to reinvest all earnings into business operations and growth185 Issuer Purchases of Equity Securities (Q4 2023) | Period | Total Shares Purchased | Weighted Avg. Price Paid per Share | | :--- | :--- | :--- | | Oct 2023 | 3,986 | $14.54 | | Nov 2023 | 428 | $12.19 | | Dec 2023 | 1,048 | $14.41 | | Total | 5,462 | $14.33 | Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2023, Certara's revenue grew 6% to $354.3 million, but a $55.4 million net loss resulted from goodwill impairment and contingent consideration expenses, while liquidity remains strong Key Performance Indicators Key performance indicators include bookings, which decreased to $402.3 million in 2023, and the software renewal rate, which was 88% Quarterly Bookings and Renewal Rates | (In Millions) | 2022 Full Year | 2023 Full Year | Change | | :--- | :--- | :--- | :--- | | Bookings | $409.0 | $402.3 | (1.6)% | | Renewal Rate | 91% | 88% | (3 pp) | Results of Operations FY2023 revenue grew 6% to $354.3 million, but a $55.4 million net loss was driven by impairment and contingent consideration, contrasting with FY2022's $14.7 million net income Consolidated Statement of Operations Data (in thousands) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenues | $354,337 | $335,644 | $286,104 | | Income (loss) from operations | $(40,774) | $32,521 | $13,579 | | Net income (loss) | $(55,357) | $14,731 | $(13,266) | - 2023 vs. 2022: Revenue increased 6% to $354.3 million, driven by 14% software revenue growth, resulting in a $55.4 million net loss due to a $47.0 million goodwill impairment and $24.1 million contingent consideration expense340358 - 2022 vs. 2021: Revenue increased 17% to $335.6 million, with 33% software growth, leading to a $14.7 million net income from a $13.3 million net loss, aided by lower acquisition costs360403410 Liquidity and Capital Resources As of December 31, 2023, Certara held $235.0 million in cash, generated $82.8 million from operations, used $79.6 million in investing, and had $294.5 million in long-term debt Summary of Cash Flows (in thousands) | Cash Flow | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $82,755 | $92,543 | $60,388 | | Net cash used in investing activities | $(79,550) | $(27,837) | $(269,922) | | Net cash provided by (used in) financing activities | $(9,447) | $(7,363) | $123,391 | - As of December 31, 2023, the company held $235.0 million in cash and cash equivalents and $294.5 million in outstanding term loan borrowings468782 - The decrease in 2023 operating cash flow was primarily due to lower deferred revenue inflow and increased cash used for liabilities and taxes421 Quantitative and Qualitative Disclosures About Market Risk Certara faces foreign currency risk from 27% of revenue outside the U.S. and interest rate risk from $294.5 million in variable-rate debt, partially mitigated by swaps - The company faces foreign currency exchange risk, with 27% of 2023 revenue from outside the U.S.; a hypothetical 10% USD change could impact income by approximately $2.4 million543544 - The company is exposed to interest rate risk from $294.5 million in variable-rate term loan borrowings, partially mitigated by interest rate swaps valued at $5.6 million as of year-end553554 Financial Statements and Supplementary Data This section presents audited consolidated financial statements for FY2023 and FY2022, with RSM US LLP providing an unqualified opinion on both financials and internal controls Consolidated Balance Sheet Data (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $234,951 | $236,586 | | Total Assets | $1,563,140 | $1,572,922 | | Total Liabilities | $516,300 | $493,261 | | Total Stockholders' Equity | $1,046,840 | $1,079,661 | - RSM US LLP issued an unqualified opinion on the consolidated financial statements for 2023 and 2022, and on the effectiveness of internal control over financial reporting as of December 31, 2023562597 - In 2023, the company completed three acquisitions (DIDB, Formedix, ABM), resulting in $40.2 million in intangible assets and $9.7 million in contingent consideration liabilities587589 - A $46,984 thousand goodwill impairment charge was recorded in Q3 2023 for the Regulatory Writing reporting unit375 Controls and Procedures Management, including CEO and CFO, concluded disclosure controls and internal controls over financial reporting were effective as of December 31, 2023, with an unqualified audit opinion from RSM US LLP - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2023576 - Management assessed internal control over financial reporting as effective as of December 31, 2023, a conclusion audited and affirmed with an unqualified opinion by RSM US LLP578579 Part III Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for Items 10-14, covering governance, compensation, and ownership, is incorporated by reference from the definitive proxy statement for the 2023 Annual Meeting - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the definitive proxy statement, expected to be filed within 120 days of December 31, 2023939940941943945 Part IV Exhibits, Financial Statement Schedules This section lists financial statements (in Item 8) and exhibits filed as part of the Annual Report on Form 10-K - This section lists all documents filed as part of the annual report, including financial statements (in Item 8) and exhibits required by Item 601 of Regulation S-K931948