Certara (CERT) and selling shareholders intend to raise an estimated $500 million in an IPO of its common stock, according to an S-1 registration statement.

Princeton, New Jersey-based Certara was founded to develop biosimulation software to assist biopharmaceutical companies in conducting virtual trials to predict how drugs might behave in patients.

Management is headed by William Feehery, Ph.D, who has been with the firm since June 2019 and was previously president of DuPont Industrial Biosciences

Below is a brief overview video of Certara:

Source: Certara

The firm's primary markets include:

  • Biosimulation
  • Regulatory Science
  • Market Access

Certara has received at least $510 million from investors including EQT AB and Arsenal Investors.

The company pursues biopharmaceutical firms via a direct sales and marketing approach and had more 1,600 biopharma companies and academic institutions in 60 countries as customers as of the end of 2019.

Additionally, numerous regulatory authorities are customers, including the U.S. FDA, European EMA, Health Canada, Japan's PMDA and China's NMPA.

Sales and Marketing expenses as a percentage of total revenue have been dropping as revenues have increased.

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, dropped to 2.8x in the most recent reporting period.

According to a 2020 market research report by Grand View Research, the global biosimulation market was an estimated $1.2 billion in value in 2016 and is expected to reach $2.1 billion in 2020.

The market is forecast to reach nearly $3.8 billion by 2024, growing at a very strong CAGR of 15.4%.

The main drivers for this expected growth are a growing incidence of relapse due to patients acquiring drug resistance in diseases including tuberculosis, cancer and bacterial infections.

Below is a chart showing the historical and projected North America biosimulation market:

certaramkt

Also, biosimulation firms continue to develop innovative technologies to enhance the cost-reduction benefits of their products.

Major competitive or other industry participants include:

  • Dassault Systemes (DASTY)
  • Advanced Chemistry Development
  • Schrodinger (SDGR)
  • Genedata AG
  • Rhenovia Pharma

Certara’s recent financial results can be summarized as follows:

  • Growing topline revenue
  • Increasing gross profit and gross margin
  • Growing operating profit and margin
  • Increasing cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

certarapl

Source: Company registration statement

As of September 30, 2020, Certara had $29.9 million in cash and $522.8 million in total liabilities.

Free cash flow during the twelve months ended September 30, 2020, was $45.2

Certara intends to raise an estimated $500 million in gross proceeds from an IPO of its common stock.

The firm intends to sell 14.63 million shares and selling shareholders hope to sell 9.76 million shares at a proposed midpoint price of $20.50 per share.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $3.5 billion, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 15.97%.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds received by us from this offering to repay outstanding indebtedness under the Loan Agreement, a portion of our term loan under our Credit Agreement and the remainder for general corporate purposes.

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are Jefferies, Morgan Stanley, BofA Securities, Credit Suisse, Barclays and William Blair.

Commentary

Certara is seeking funding from the public to pay down debt and fund its growth plans.

CERT’s financials show growing topline revenue and gross profit, a swing to net income and increasing positive cash flow from operations.

Sales and Marketing expenses as a percentage of total revenue have dropped, while its Sales and Marketing efficiency rate has also dropped, likely a result of a Covid-19-related slowdown in its sales cycle.

The market opportunity for biosimulation software is expected to grow at an impressive rate over the coming years, as the biopharmaceutical industry seeks to speed up its drug discovery and development efforts while derisking the process.

Jefferies is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 125.5% since their IPO. This is a top-tier performance for all major underwriters during the period.

As to valuation, compared to competitor Schrodinger, the IPO’s metrics appear favorable. Especially since CERT is slightly profitable versus SDGR’s material negative earnings.

However, CERT has produced slower revenue growth over the last 12 months than SDGR.

While Certara has likely been negatively impacted by the Covid-19 pandemic, the IPO appears reasonably valued and the firm is operating in a favorably growing industry.

My opinion on the IPO is a BUY at up to $20.50 per share.

BUY

Expected IPO Pricing Date: December 10, 2020.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice. Past performance is no guarantee of future results.)

To receive automatic notification of new IPO activity, click the "+ Follow" button.