Certara Inc. (NASDAQ:CERT) is a leading provider of model-informed drug development and regulatory science solutions to biopharmaceutical and medical device companies. The company operates in a growing market, driven primarily by tailwinds such as patients having a higher drug resistance causing relapse, but also larger demand for personalized medicine. Certara’s strong revenue growth, expanding margins, and solid balance sheet makes it an attractive investment opportunity.
In terms of valuation, Certara’s current P/E ratio is higher than its peers in the industry, which I normally am worried about, especially with smaller companies as they are usually yet to prove themselves.
Overall, considering Certara’s strong position in a growing market, expanding margins, and positive revenue growth the outlook I think remains quite positive. But with the premium you would have to pay, I think it seems more fitting to rate the company a hold and wait for it to grow into its current valuation.
Certara Inc. operates in the pharmaceutical and biotechnology industry, which is a rapidly growing market. The industry is expected to grow significantly over the next few years, driven by an aging population and an increasing number of chronic diseases. According to a report by Grand View Research, global pharmaceutical analytic testing is expected to grow at a CAGR of 8% from 2022 to 2030. The report also states that the increasing prevalence of chronic diseases, such as cancer, diabetes, and cardiovascular diseases, is expected to drive the demand for drugs in the coming years. I think this is a major tailwind that the company will be a large beneficiary of.
One of the main drivers of growth in the pharmaceutical industry is the increasing use of personalized medicine. As the healthcare industry shifts towards a more personalized approach to treatment, I believe companies like Certara that specialize in developing computer-based models and simulations to support drug development and regulatory approval are well-positioned to benefit from this trend. The company’s proprietary software and expertise in pharmacology, pharmacometrics, and regulatory science are critical for developing new drugs and bringing them to market. But I find that the rising demand for biosimulation could also become a catalyst for the industry, not just for Certara.
Another tailwind for the industry is the increasing use of artificial intelligence and machine learning in drug development. AI and machine learning are being used to identify new drug targets, design more effective clinical trials, and improve patient selection. The push towards further streamlining the process of identifying and researching new medicinal solutions is becoming more and more important. I find it very comforting that a company like Certara seems to be placing a priority on this and not just letting themselves end up on the sidelines. As a leading provider of AI-enabled drug development solutions, I think Certara is positioning itself in the emerging and growing market.
Driven by demographic and lifestyle changes, the need for services that Certara provides will continue to be in high demand in my opinion.
In its most recent condensed consolidated balance sheet, Certara reported total assets of $1.57 billion as of December 31, 2022, compared to $1.51 billion as of December 31, 2021, indicating a growth of approximately 4% over the year.
The company’s current assets stood at $342.25 million, up from $274.73 million in the previous year. Cash and cash equivalents were reported to be $236.59 million, showing an increase of over $50 million from the previous year. I think that an increased priority in building out a strong cash position is great to see. As most people know, it’s becoming more expensive to borrow money and take on debt. With a stronger cash position, I think Certara will have the needs necessary to get ahead of the competition.
On the other hand, other assets reported a slight decrease in value, with property and equipment netting $2.40 million, down from $2.93 million in the previous year. Operating lease right-of-use assets were reported at $14.43 million, compared to $12.63 million in the previous year, and other long-term assets were reported at $5.62 million, up from $2.17 million in the previous year. Not a very worrying trend in my opinion. I think it’s something we have seen across the board, companies cutting down slightly and making their balance sheets slimmer and flexible to more rapid changes.
In terms of liabilities and stockholders’ equity, the company’s current liabilities increased to $103.16 million from $92.23 million in the previous year, while long-term liabilities decreased to $380.10 million from $382.60 million in the previous year. Even though the decrease is small, it’s a move in the right direction. I want to see them get a less debt-heavy balance sheet and in turn, have the ability to maneuver more freely and make the necessary investments to stay ahead in the market.
Overall, Certara’s balance sheet seems to be in a relatively stable position, with a moderate increase in assets and somewhat manageable levels of debt. A highlight is the increased cash position, a move I think will greatly benefit the company and free up some constraints. But the reduction of debt is obviously a nice move to also see. If Certara can manage to get through the heightened interest rate environment we are in unscathed, then I believe the market is theirs for the taking. If they choose to take on more debt to fund projects I wouldn’t see it as a negative, but that could be years in the future, and who knows what the interest rates might be then.
Like any company, Certara Inc. faces several risks that investors should be aware of before making any investment decisions. Some of the major risks include:
Dependence on a limited number of clients: Certara Inc. relies on a limited number of clients for a significant portion of its revenue. The loss of one or more of these clients could have a significant impact on the company’s financial performance.
Regulatory risk: Certara operates in a heavily regulated industry, and changes to regulations or failure to comply with existing regulations could result in legal and financial liabilities, as well as damage to the company’s reputation.
Acquisition integration risk: Certara has made several acquisitions in recent years to expand its offerings and market reach. Integrating these acquisitions successfully could be a challenge and failure to do so could result in financial and operational issues.
I think the number one spot on what might be the biggest risk for the company is reckless spending. The market will always have competition, and a fierce one as well. If the management team of Certara sees too much need for making acquisitions to get ahead, it could backfire.
Going a bit deeper on the small number of clients the company has: as spending is becoming more restricted among companies to help hedge against turmoil, there are fewer investments being made and this slowdown could hurt Certara as they might struggle to keep up margins and expenses down. But as the company also generates revenues from much smaller biotech companies, I think a higher interest rate could greatly hurt these smaller companies as they will simply stop investing more. To make it simple, Certara could essentially lose a significant portion of revenues if their clients get squeezed enough as the debt they have becomes too expensive.
Valuation and Conclusion
In terms of valuation, Certara Inc. stock appears to be trading at a premium compared to its peers in the same industry. The company’s market capitalization stands at approximately $3.1 billion, with a price-to-sales ratio of 9.1 and a price-to-book ratio of 2.88. These valuations are relatively high compared to the average ratios for the pharmaceutical and biotech industry. I tend to be worried when I see companies like this as maybe the hype is solely what got them to these valuations, and not the proof of it being successful.
However, it’s worth noting that the biotech industry as a whole is experiencing significant growth. This growth is being driven by a range of factors, including the increasing prevalence of chronic diseases, rising healthcare costs, and advances in technology. As people are becoming older and in need of health services for longer, there will continue to be a high demand for the sector as a whole. But looking closely at Certara, the trend of patients developing drug resistance, the need for finding new solutions remains vital, which is where Certara comes in.
With all that said, the company has a bright future and I expect them to continue being able to increase both its top and bottom line. But when I invest I want to have some sort of safety net. I don’t have that with Certara right now as the valuation is quite high. Until the company has a better entry price, I wouldn’t want to put more into an investment. However, I do see the potential of the company and find that a hold for them is reasonable given the stable balance sheet they have developed and also the strong market tailwinds.