EMA Approval And AI Integration Will Drive Biosimulation Despite Risks

Key Takeaways

• Regulatory approvals and industry trends are boosting demand for Certara's biosimulation platforms, expanding its market and supporting stronger revenue streams.
  
• Product innovation, strategic acquisitions, and cloud-based SaaS models increase customer retention, cross-selling, and margins, enhancing long-term profitability and earnings stability.
  
• Certara's growth and profitability face risks from slow pharma adoption, reliance on large customers, rising costs, regulatory uncertainty, and possible delays in achieving returns from technology investments.

Catalysts

Provides technology-enabled services and software products for biosimulation in drug discovery, preclinical and clinical research, regulatory submissions, and market access in the United States and internationally.

• The recent qualification of Certara's Simcyp platform by the European Medicines Agency sets it apart as the only PBPK modeling tool with such approval, likely to increase customer adoption among global pharma companies seeking regulatory certainty and speed for their drug approvals, supporting future revenue growth.
  
• Strong industry and regulatory momentum-such as the FDA's guidance to phase out animal testing in monoclonal antibody development-are rapidly increasing the need for biosimulation and model-informed drug development, expanding Certara's addressable market and driving sustained demand, positively impacting both revenues and bookings.
  
• The upcoming commercial launch of Certara's next-generation, AI-enabled MIDD platform and CertaraIQ QSP software leverages advanced analytics and machine learning, providing differentiated capabilities that democratize access and increase the potential customer base, which should translate to higher recurring revenue and margin expansion through cloud-based SaaS models.
  
• Integration of newly acquired businesses (like Applied BioMath and Formedix), combined with more robust cross-selling between consulting and software offerings, positions Certara to drive higher deal sizes and improve operating leverage, which strengthens both net margins and operating income over time.
  
• Investment in cloud-based delivery and ongoing product innovation (as shown with updates to Phoenix and Pinnacle21 suites) further enhances customer stickiness and predictability of subscription revenue, supporting gross margin stability and long-term earnings growth.

Certara Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Certara's revenue will grow by 8.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.0% today to 1.4% in 3 years time.
• Analysts expect earnings to reach $7.4 million (and earnings per share of $0.04) by about August 2028, down from $8.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 394.4x on those 2028 earnings, up from 226.6x today. This future PE is greater than the current PE for the US Healthcare Services industry at 58.5x.
• Analysts expect the number of shares outstanding to decline by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.27%, as per the Simply Wall St company report.

Certara Future Earnings Per Share Growth

Risks

• The company faces potential headwinds from pharmaceutical industry cost containment, large pharma customer caution, and increased geopolitical and macroeconomic uncertainty-factors (including proposed tariffs and new pricing algorithms) that could delay decision-making and depress R&D budgets, which would negatively impact Certara's revenue and bookings growth in the long term.
  
• Certara's R&D and operational spending has been increasing, with significant discretionary investments in software development, AI, and new product launches, and with the integration of multiple recent acquisitions. If these investments fail to generate expected adoption or ROI, operating expenses and margin pressure could undermine net earnings and profitability.
  
• The company's continued growth depends heavily on adoption of new technologies (AI-enabled platforms, next-generation QSP products, etc.) and regulatory acceptance; any delays, low market uptake, or challenges in convincing regulators to integrate AI with model-informed drug development could slow software growth and diminish future revenues.
  
• Although there is optimism about the multibillion-dollar addressable market for biosimulation (especially due to moves like the FDA's push to phase out animal testing), the adoption curve in pharma is often slow and complex, with many customers only piloting or cautiously expanding platform use-if customer education, regulatory clarity, or adoption stalls, bookings and revenue growth may not materialize as quickly as projected, affecting long-term earnings.
  
• Certara's top-line and financial performance remains exposed to customer tier concentration; softness or timing issues from large Tier 1 customers can cause significant volatility in bookings and renewal cycles, making revenue less predictable and increasing risk to both revenue consistency and operating margins if consolidation or budget reductions occur among top clients.

Valuation

• The analysts have a consensus price target of $14.444 for Certara based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $16.0, and the most bearish reporting a price target of just $11.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $520.7 million, earnings will come to $7.4 million, and it would be trading on a PE ratio of 394.4x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $11.26, the analyst price target of $14.44 is 22.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.