Many metrics are used to measure the dwindling efficiency of drug development. One estimate suggests it can take over 10 years and $2 billion to bring a new therapeutic to market, although that seems a little inflated to me.
Another suggests only 8% of drug candidates that enter a Phase 1 clinical trial earn regulatory approval, while just over half of drug candidates survive a Phase 3 study.
One thing is clear no matter what metric investors use: Drug development is pretty inefficient. What drives wasteful spending and lengthy timelines? Unfortunately, there's no single or simple answer.
Companies may do a poor job of nominating drug candidates in discovery studies, which is the first step of drug development. Poorly-designed clinical trials that don't collect robust data can also contribute to unnecessary expenditures and bloated R&D budgets. After all, the worst designed clinical trial is the one that shouldn't have been conducted in the first place.
The industry is aware of the problem. In fact, an emerging crop of companies is eager to develop solutions and capture multi-billion-dollar opportunities in the process. Certara (CERT) is one business that's profitable today and has a long growth runway ahead.
Virtual Patients (and Monkeys) to Aid Trial Design
Certara is the leading biosimulation company. Biosimulation is the use of computational modeling to predict study outcomes and drug properties.
For example, one of the company's software products allows drug developers to administer drug candidates to virtual monkeys, informing development and sometimes sparing living animals. Another tool can be used to conduct virtual clinical trials with virtual patients, informing decisions about study design or whether to advance an asset to the next stage of development.
Drug developers who want to better understand toxicity in certain organs, interactions with other medications, or optimize dosing levels before testing in humans can also find software tools for that purpose.
Even that's only scratching the surface of the technology's potential. Biosimulation has already made solid contributions to the drug development industry.
- An estimated 90% of all drug approvals granted by the U.S. Food and Drug Administration from 2014 to 2021 belonged to Certara customers.
- Certara counts over 2,000 global customers spanning nearly every area of medicine and therapeutic modality, including emerging tools such as gene therapy and protein degradation.
- The FDA has allowed data generated from biosimulation to inform drug product labels, helping companies to avoid running additional or larger clinical trials.
- The FDA approved an acne drug for adolescents in 2020 using only data from biosimulation models – no study in humans required – an industry first.
Certara built its technology platform through a combination of 16 acquisitions and in-house development. It offers software products and services for any stage of a drug asset's life cycle, from modeling initial discovery studies to submitting applications to regulators. In fact, 17 different regulatory agencies across the globe license the company's software for accepting or parsing submissions for new drugs, although this counts multiple agencies within the FDA.
The progress and track record has helped Certara reach profitability while still investing in growth. The business delivered a gross margin of 61%, positive operating income, and over $60 million of operating cash flow in 2021.
It's important to note the business expects to generate only 34% of full-year 2022 revenue from software, with the balance generated from services. That's a potential headwind for the business. Software revenue has much higher margins than services revenue, which requires a costly labor component and isn't nearly as scalable.
The company is eager to increase software's contribution to the revenue mix, as evidenced by the acquisition of Pinnacle 21 last year. The largest acquisition in the company's history will drive year-over-year revenue growth of over 20% (the company aims for roughly 15% per year) and boosted software revenue from just 30% of the revenue mix in 2021.
Investors seem less willing to nitpick revenue mix in a world overcome by tightening financial conditions. Rather, Certara is earning a relative premium as fundamentals once again take center stage in stock analysis. That's hardly the only tailwind for the industry leader.
A Long Growth Runway and Potential Blockbusters to Boot
Certara is continuously improving existing tools, launching new tools, and developing or acquiring new technologies. For example, it launched 11 new products or substantial updates in 2021 alone.
One promising technology in development is called virtual twin. Already used to inform clinical trial design and dosing levels, virtual twin could one day be refined for local doctor offices. In other words, your doctor may one day simulate the safety and efficacy of a medication on your own virtual twin before writing you a prescription. That could increase the chances a prescribed drug works for your genetics – and plays nice with any other medications you might take – to drive better outcomes for you, sooner.
The blockbuster potential of a mass market virtual twin product remains years away for now. Until then, investors can take comfort knowing Certara can deliver predictable performance and profitability. Management expects to grow revenue at about 15% annually for the foreseeable future, although that excludes contributions from acquisitions for a historically trigger-happy company.
The stated growth rate is in line with the overall economic opportunity available to the business, which is expected to grow from $13 billion in 2021 to over $21 billion in 2026. Considering the business maintains a dominant position in the highly fragmented space, investors have to appreciate the potential for Certara to anchor their portfolio for the rest of the decade.
