Simulations Plus, Inc. (SLP) Earnings Call Transcript & Summary

Great. I think we're ready to roll. My name is Michael Ryskin. I'm on the life science tools and diagnostics team here at Bank of America. And for our next session, we're joined by Simulations Plus. With us, we have CEO, Shawn O'Connor. Shawn, thank you for taking the time. And I think to get going, we're going to start with a quick slide show introduction. Just to set the background a little bit. Investors, you should be able to see the slides through the portal, you're going to control them yourselves so that just sort of you can click through as Shawn goes through the slides and he'll call out the individual slides. Shawn? Go ahead.

Thank you, Michael, and welcome, everyone. Good morning, good afternoon or good evening wherever you might be. I appreciate the opportunity to tell you a little bit about Simulations Plus. I understand you guys are controlling the slides, I'll try and reference as I run through them here and jumping quickly to Slide 3. In the marketplace where modeling and simulation is getting a lot of attention today. We are a company that is celebrating our 25th anniversary in the business of supporting our pharma and biotech companies in their modeling and simulation needs. Having started in the early days of adoption of modeling and simulation 25 years ago, we now have been in the business, growing revenues and profitability consistently for more than 10 years, 250 clients, high retention of those clients and look forward to describing a little bit about what we do in support of those clients. Obviously, from an investor highlights perspective, Slide 4. We're a leader in this space. Some of our software products are market share leaders. Some of them are up and coming market share accumulators in the industry, and we have an extensive service site to our business as well. Modeling and simulation, at this point in time, is still a low penetration in terms of the industry despite this long-term adoption cycle, but it's getting a tremendous amount of focus today, as proof cases, regulatory support and the pressures on the industry to be more productive and their efforts have come to bear. And in addition to our organic growth over time, we have, to date, closed and added to our footprint with acquisitions in the past and aggressively are undertaking that strategy still here into the future. Slide 5, the marketplace, you see these statistics in most every presentation in terms of the large spend in R&D and the pharma/biotech space. And our focus is in the biosimulation segment of that market, a market that is generally accepted to be about $2 billion in size and growing 12% to 15% in annual increases. Slide 6. The challenge here is that drug development process that average cost of about $2 billion to bring a drug to market, a time frame of 10 or more years for that development to come to fruition, and a very low batting average, 5,000 target drug molecules into the cycle for every 1 drug that is produced or approved at the end of the day and brought to market. Several challenges that caused that high cost and time frame to bring that drug to market. How does the drug work? Is it safe? What's the right regimen? What is the biological effect? What are the risks or toxicity? And our products and services are focused on answering those questions, answering those questions in silico, reduce the trial-and-error nature of the historical process and accelerate and bring it into a more accurate frame. Our value proposition. Modeling and simulation is a means by which you can impact and get to an efficacy, safety, regulatory approval and a commercial success more efficiently. We do that by reducing that trial-and-error process. We deliver very accurate drug and biological models to our clients for their use, in the analysis from early discovery through to regulatory approval, addressing those efficacy and toxicity questions more quickly. We deliver predictive AI and machine learning capabilities into that lead optimization process and provide input in terms of more accurate clinical trial protocols, simulations of clinical trials, iterative process to hone them on better target protocols to improve the accuracy and success rate of those clinical trials. Slide 8. How do we do that? We have a portfolio of software products, and I'll quickly walk you through, all of which are recognized as leading tools for model informed data-driven drug development. And we have a consulting practice that supports our clients from basic outsourcing needs to addressing more tricky issues in terms of modeling and simulation techniques and/or therapeutic area knowledge that our staff has built up over time. Slide #9 just lays out and shows that our products and services impact from that early discovery stage through to preclinical into animal testing and first-in-human testing through the large Phase III clinical trials and support FDA and other regulatory body submissions at the end of the day. Modeling and simulation is an umbrella term that covers a number of different techniques. Our techniques cover the gamut from cheminformatics and AI machine learning tools to PBPK, which is physiologically based pharmacokinetic solutions -- pharmacometric solutions, is a strength on our part with both software and consulting services support in that space. Mechanistic modeling, quantitative systems pharmacology and toxicology, it's often referred to, is a strength that I'll walk through in terms of products. And then as I say, our group of more than 75 PhD scientists in our consulting practice supporting our needs and additionally in supporting regulatory advice in preparation for those submissions to the regulatory bodies to optimize our clients' success in that regard as well. Slide #10. Our PBPK solutions that I referred to, the flagship product for the company, the origin of the company was GastroPlus. It is the leading PBPK platform in the marketplace, utilized in out of discovery into preclinical phases to provide those initial models, for drugs in the biological models surrounding the target of those drugs. And additionally, ADMET Predictor is our second contributing software product used in the lead selection segment to assist our clients in terms of initiating molecules in the drug development cycle. Slide #11. The QSP/QST solutions, leading solution in this space, DILIsym, a drug-induced liver injury model that is utilized in that important feature, often drugs provide appropriate efficacy and reasonable toxicity profiles, but the long-term liver injury issues often come up over time. Our simulation model here allows for a long-term evaluation of that drug and its impact in the addressing of liver injury issues. We've expanded our QSP/QST offerings into RENAsym, NAFLDsym, IPFsym, RADAsym. These are all mechanistic models that address either the pharmacology or the toxicity of kidney, lung and other therapeutic areas. Finally, pharmacometric solutions. Here, Monolix is a product that came through us through acquisition a little bit more than a year ago, up-and-coming pharmacometric solution that provides our clients a workflow approach and functionality that covers data analysis to NCA and LME modeling trial simulation and reporting efforts. A workflow platform that is being embraced quite aggressively by the industry. And our Cognigen consulting services in this space is the leading provider of this type of service to our clients. Growth opportunities. As we move forward, obviously, the industry is growing. The allocation of R&D resources to the biosimulation space is growing faster than the overall growth rate of R&D spend. More and more funds are being applied to biosimulation techniques. We've introduced a more aggressive sales and distribution effort, with the investment in both internal resources, expanding our distributors around geographical areas. And with the addition of products and services organically and through acquisition, increasing our ability to cross-sell with clients, the multiple products and services that we hold. So in addition to this organic growth and industry growth, our acquisition strategy as well provides a substantial runway for growth of our capabilities going forward. Slide 14, just a coverage, something we recognize and have committed resources to is to be a good corporate citizen. And you'll find ESG strategies and capabilities on our part to be -- a focus on our part and something we're very proud of. If I touch on our financial profile, just briefly before we move to Q&A. Slide 16, our revenue growth, as I say, has been quite consistent over the years. Our fiscal year-end is August 31. So we have reported through 3 quarters, and you'll see that our software growth year-to-date has exceeded last year's full year software growth, and so accelerating growth rates on that side. Software represents about 60% of our total revenues over the year, and we'll be reporting fourth quarter earnings in a couple -- 3 weeks here. Geographic coverage. Our business is focused in North America with almost 70% of our revenue sourced here, although those services are often provided to U.S. subsidiaries of large pharma direct business is then split about 20% in essentially Europe and 10% or thereabouts in Asia. Slide 18, the components of our software and service revenue, as I said, 60% of our revenues are software based and the majority 60% of those revenues come from GastroPlus and essentially 15%, 17%, each from ADMET Predictor and Monolix. And on the service side, our PK/PD services represent the largest component of that service business with QSP and PBPK services following up after that. Service performance. You can see the makeup of our projects on a quarterly basis. The majority of the projects are in the PK/PD space. You can see that new area in Q3 '21, the gray piece of that Slide 19 bar, our regulatory services essentially has really picked up over the course of the last 12 months. Our backlog sits at about $12 million. This is entirely service-based backlog and is growing quite nicely off of a slower window of time during COVID, that has picked up in the last couple of 3 quarters and is growing quite nicely now. So in summary, on Slide 20, a large leader in the modeling and simulation space across a portfolio of software products and consulting services. Penetration is relatively low across the board with opportunities with products like Monolix to take market share from some older products that are in the marketplace. Our revenue growth comes with an ability to operate or leverage our operating profitability. And in addition to this, we are aggressively moving on that M&A strategy. And with that, I'll take a deep breath, and Michael Q&A?

Great. Yes. Thanks, Shawn. I appreciate the presentation, a great way to sort of set the table here. I want to follow up on a lot of the points you touched on there. So I guess, first one would be talking about the market opportunity versus where the market is today. Annual pharma R&D spend approaching $200 billion and yet, biosimulation itself is only a $2 billion market. I realize that when we talk about total annual pharma R&D spend, there's a lot that goes into it. You can't just lump it under 1 basket, just between preclinical, clinical, tox, various components of the clinical processes. But yet, why isn't biosimulation a bigger market opportunity? And why isn't it a bigger market today already? Sort of what's the -- what have been the impediments to adoption and sort of where do you see it going in the future? How big could biosimulation get?

Yes, it's an interesting question. I've been in this business for more than 20 years, and I got that question 20 years ago, why isn't it bigger? And it's a number of factors that come into play. Starting with the science. It's a change in the approach of drug development of the past. And like any scientific endeavor, it takes a little bit of time for proof points and scientific acceptance to take place. Now one of those first slides I showed today, over 1,300 publications now cite our products our service contributions to an effort. And that 20 years ago was 1 publication or something of a much lower number, but that's indicative of the acceptance that's built up over time. The fact is modeling and simulation is kind of a combination of skill sets that runs the gamut from physics, chemistry, statistics, pharmacology, and I could go on and the number of scientists in this space. The number of people that could run the engine, so to speak, and use the software was relatively low in the early days, unique skill set. Today, there's more than a dozen in computational biology, PhD programs out there. And new entrants into the marketplace is certainly funneling the uptick in growth today. Regulatory. Obviously, it's a regulated environment. And while scientific acceptance in the industry was 1 factor. Scientific acceptance in the regulatory environment was another key factor. And over time, FDA and their equivalents around the world began to utilize modeling and simulation as well internally and their evaluation of drug submissions. And over time, that is built up to a FDA that today issues guidance -- guidelines to the industry and support of modeling and simulation. So they're not only using it internally to evaluate and like in the legal world, a lawyer never wants to go into the courtroom and ask a question without knowing the answer, our clients know FDA is using these techniques as well and that supports adoption out there. When COVID hit, one of the first FDA guidelines to the industry was how modeling and simulation could be used to contain or still maintain the value of clinical trials that were disrupted in that environment. So modeling and simulation today is at the forefront. It's accepted scientifically, it's supported from a regular -- regulatory point of view. And there are more and more scientists in this field that can undertake this type of effort. And finally, the use cases, the application of modeling and simulation through that drug continuum on specific decisions is expanding quite rapidly as well. So we've seen an uptick -- significant uptick in the adoption of modeling and simulation over the last, I'd say, 4, 5 years. And I don't see any change in that. It will continue to grow faster than overall R&D spend and continue to flourish into the future here.

And on that point, you have both the software offering and a service offering. Any difference in terms of customer uptake between the 2 in recent years? Sort of is there a preferred approach that you're seeing as emerge among your customers? And sort of do they want to build this out internally or do they want to use the Simulations Plus services offering sort of to just essentially outsource this part of the business?

Yes, it's -- both are -- there's appetite for both. And there's an element of the typical scenario where larger companies build in-house resources, and therefore, our acquirers, the licenses -- licensees of our software products. And medium-sized to smaller entities that may not be in a position to move as aggressively in terms of building in-house modeling groups are likely to be service clients. That said, our largest service clients are large pharma, who are most aggressively implementing the use of modeling and simulation, and therefore, supplement their internal departments with outside consulting services. And often, it's by design strategically trying to maintain relationships with outside providers like Simulations Plus because a lot of the accelerated advancements, the development of new techniques, new approaches using modeling and simulation get born out of our practice. And therefore, even the large entities that have internal departments want to maintain relationships with a company like Simulations Plus on a service basis to maintain that network of resources that is available to them when they encounter a tricky issue.

Got it. And another area, you touched on in your presentation is sort of the opportunity to cross-sell among the various products. And we still see the GastroPlus, as you said, the foundational platform, it still comprises a significant portion of your revenues. How many of your customers really do tap into more than 1 solution? How often do you see sort of the cross-selling continue to ramp up over time? And how broad are these opportunities? Do you have any customers that use literally the entire spectrum?

Of course, yes. No, we have several large entities that utilize the full suite of products and services, but there are gaps. The industry itself is a very siloed process. Discovery departments, clinical departments. And modeling and simulation developed that way in its early days of solutions to the various departments in a very sort of point effort. As modeling has become more strategically a theme in our clients, they look more broadly at the use of modeling from start to finish, and therefore, are more open and looking for solutions that can carry forth and be consistently applied across the drug development continuum. And that's been a focus on our part at Simulations Plus to develop a suite of platforms that can support the full scope of modeling needs of our clients. And it is a -- in the future, going to be an even more significant need on the part of our clients. To eliminate -- while modeling and simulation is a source of efficiency, there are inefficiencies in modeling and simulation that can be eliminated through integrated solutions that run the gamut of the drug developer's timeline. And so for us, as we've accumulated both organically and through M&A activities, a number of platforms and then for types of services, our focus now is in terms of presenting to our clients the full suite of services that we can do to support them and are seeing quite an active cross-selling activity taking place right now.

And what do you think are the biggest drivers of growth? Is it cross-sell among existing customers and penetration as in new customers, sort of what are the levers you have that you're pushing that?

Yes, all fronts. A typical quarter for us, 80% of our software revenues comes from renewal and the other 20% new business in any given quarter. It is driven about 50-50 between expanding use of our products and services from existing companies and the other 10% coming from new logos, new clients that are trying us for the first time. So both are important. Those that have been committed to using modeling and simulation, we see rapid growth in their application and expansion of their needs and therefore, more seats required of our products and as well as there are more and more scientists in the industry. We're seeing those entities that maybe previously were just a service opportunity and outsourcing opportunity. They now are being able to hire those people and bring licenses in-house as well. And then finally, very focused in terms of making these tools easier to use, more efficient and that brings new companies into the fold as well.

Over the past couple of years, have you noticed a change in terms of conversations with customers? Are they becoming more aware of the benefits of the value-add of biosimulation sort of as you try to onboard new customers? Are you noticing any shift in the industry in terms of acceptance of this as a standard almost?

Yes. It's no longer why should I use this? Or does this really work? It is how can I do more of this starting point to conversations. It is how can I implement it with traction as quick as possible. The number of use cases has been expanding tremendously. When the FDA takes an approach and issues, what today, by way of example here, a bioequivalence waiver, basically a position on the part of the FDA that I'll waive the requirement to go into the clinic and perform a clinical trial to prove an efficacy or toxicity issue rather than pushing into clinic provides a waiver of that effort based upon data and analytics brought to them through modeling and simulation. That is a waiver that can have tremendous dollars and cents impact. Obviously, the time to do a clinical trial and the cost of the clinical trial, the real impact is getting that drug to market 6 months earlier, a year earlier. And initiating the revenue stream for that drug can be quite dramatic, and so our clients, as they see those headlines of impact for modeling and simulation, their appetite to understand where they can impact their programs in the same way is pretty healthy.

And you touched -- in your answer there, you touched on the regulator aspect as well. We noticed sort of clearly a strong relationship with the FDA. But if we look at your global revenue base underpenetrated in EMEA, probably underpenetrated in APAC. What do you think is driving that? Why is adoption slower there? It's just that you're born as familiar with the technology or is it related to regulator adoption? What can you do to drive OUS expansion more?

Yes. While there is some lag in terms of the FDA, North American market typically being at a faster pace on the adoption of these sort of new techniques and approaches. Part of that is self-inflicted pain on the part of Simulations Plus in the sense that I think we have opportunity that sits in front of us through our expansion of our capabilities into those territories. Adoption modeling and simulation in Europe, in Asia, is pretty much just as strong as here in North America. And our presence in those markets has been a lag. Our number of consultants we have on the ground in Europe and on the ground in Asia is too few for us to participate as strong as we should be in those areas. So half full glass perspective, I see that as a tremendous opportunity to add to the growth of the company going forward as we expand our reach into those 2 territories. Drug development on a worldwide basis, majority or the largest segment of it is in North America. So there will always be that 60, 20-20 split, but ourselves and plus, there is probably accelerated growth opportunities for us as we improve our presence in those 2 markets.

Got it. And you touched on -- briefly on the competitive landscape a little bit, and I think we hosted one of your competitors earlier this morning. But could you help us get a sense of sort of just how much overlap there is because it's not really -- we tend to summarize it just by saying biosimulation, biosimulation, but clearly there's a number of different software solutions, right? I think you can't compare the ADMET Predictor and GastroPlus and some of your pharmacometric solutions. So just how much overlap is there between you and some of the other players in this field? And how much really is unique to just Simulations Plus versus an area where your customers could see multiple options?

Yes. No, fair question. And I'd say there's a large enough sandbox here where we are all thriving with the opportunities that are in front of us. And secondly, I would say that clients typically use all of these products. And it's not an all or nothing, I use this platform versus that platform often. It's a combination of platforms that are being deployed by our clients. That being said, yes, we do have some overlap in competition. Certara comes up frequently in their biosimulation market, which is just a portion of their business as they've expanded over the years into other areas, regulatory writing, for example, a space that we don't focus on. We're very focused in terms of biosimulation tools and services. But in that space, there's some competition on the PBPK platform side, our GastroPlus product, there's Simcyp product, sort of similar needs for our clients. As I say, typically, our clients will utilize both. I think ours is considered the sort of workhorse engine, and the majority of their needs are filled by GastroPlus. And there's some functionality, some therapeutic areas in which the insights that can come from Simcyp are appreciated. I won't go into the sales pitch as to why that shouldn't be the case, but it is the case that both for you in some places. But I think ours is the largest platform in terms of customer count, et cetera. ADMET Predictor that supports the lead optimization process and discovery, not really any strength competitor out there for that 2D predictive capability that can take a molecule and provide predictive information across 140, 150 different characteristics. No real direct competitor, often wait a minute, isn't Schrödinger in that space? Yes, they are with a tremendous 3D tool that is complementary. It's not competitive with ADMET Predictor. So a client will typically use both tools in their lead optimization process. Monolix. Our pharmacometric tool. Its primary competitor is NONMEM an application that was really one of the first products in modeling and simulation 25 years ago out of UCSF. And it still is in the market where you compete quite nicely with Monolix against NONMEM, the modern front end, the modern technological architecture. The workflow orientation of Monolix is greatly appreciated. And we are not only doing well in terms of new business, but in terms of taking market share in that space with Monolix. So a little competition there, but we are the up and coming, fast-growing alternative to the old product in that space. On the consulting side, Certara performs PK/PD services, which is the breadth of our efforts there. And then a host of I think behind ourselves and Certara, the 2 largest providers of service in this space. A number of -- one scientist with a shingle out to 20%, 50 people may be sized organizations out there. But I think Certara and Simulations Plus are the 2 largest providers on the service side.

And I think maybe natural progression from that question would be to talk about the M&A strategy. As you've said, you've done some deals in the past. I imagine it's been a lot of these smaller platforms, stand-alone platforms that's sort of led to the business that we see today. Is that sort of the road map going forward? Any major changes we should anticipate? And sort of how long is that runway? How many more bolt-on technologies are there?

Yes. The strategy is broad and covers both the software as well as service space, albeit our focus leans a little bit in the direction of the software side and as evidenced with 2 of the 3 acquisitions we've done to date have been more software oriented. And I would anticipate that would be the case going forward. Service opportunities exist, and I referred to our need to expand geographically in support of opportunity in Europe and Asia. Acquisition can be an enhancer in the service side in that regard. But our focus on the software side is both in terms of add-on solutions. There are expanding functionality and capabilities that could be integrated into our existing platforms as well as other stand-alone solutions that address needs in and amongst them between what we provide today. There are a good population of companies out there. Small privately funded entities that have developed solutions of this nature that would be great additions to the Sim Plus family. And so we're actively in that market and what's the runway? I don't know that the oil well will ever be dry. There are always opportunities out there. We've been pretty strict in terms of our criteria for acquisition, looking for the typical product and culture fit, but also focused on accretive situations at a good valuation point and expect our opportunities to come to fruition over the coming months and years to continue this as a key part of our strategy for growth overall, as it has been in the past.

Are there any situations where some of your pharma customers, especially the larger pharma players, are looking to develop these capabilities in-house themselves if there's sufficient demand internally just sort of to go around you or going beyond that, is there any risk of someone outside of the healthcare ecosystem, like a Google or Microsoft, someone with just a lot of computing power, computing expertise going into a field like this?

Yes. I mean, first, in terms of the internal situation, pharma has a long history of investing in tools internally and developing their own solutions. And the track record is, it's spotty to be frank, in that regard. Maybe some successes in terms of data management tools, but the data analytic tools, the value that we bring to the table is a high volume of data throughput and our ability to access that data, as opposed to a tool that was built on internal data at a specific pharma company, can be an advantage on our part. And then ultimately, whether it's internally developed tools in pharma or open source solutions out there, the need for these tools to be managed properly in a commercial software environment and be accepted by the regulatory bodies out there is a key component as well. Showing up the FDA with something that you've built that they've never seen, while the output may have some value, its starting point gets a lot more scrutiny than I've developed and I'm producing data off of GastroPlus and that familiar environment with the FDA. In terms of other players out there in the marketplace, the Googles of the world, yes, I think over time, it's been my observation that these -- the general sort of skill sets of AI and data or machine learning, modeling and simulation, the need for the specific knowledge in terms of drug development and biology is a key component here. And not that those players can't access that information as well. I think our focus in this space has been a key part of our success. And so I think there's certainly a lot of attention in terms of start-up approaches, utilizing AI in the discovery space, for example. And I think that they most certainly will bring value to the industry over time. The reality is that many of those ventures, today, we are in partnership with and they are leveraging utilizing our technology, our ADMET Predictor and GastroPlus technology and not reinventing the wheel of what we do today because of the value of what we've accomplished in the accuracy of our techniques and algorithms and models that have been born over a 20-plus year existence. So other players coming into the space has been a good thing. It's contributed the attention that this industry has gotten modeling and simulation and raised our profile with our clients. And we'll support growth of the use of modeling and simulation over time.

Great. Thanks, Shawn, very comprehensive. We're reaching the end of our allotted time, and I want to sort of get our last question in, which is a question that we'd always include, which is over the past couple of years, is there anything that you feel is being underappreciated or misunderstood by the investment community? Are there questions you consistently get that you feel like people are missing some part of the story or some part of the debate?

Well, maybe I just closed on that a little bit in the sense that Walt Woltosz the founder of the company back 25 years ago, I think, developed one of the first AI machine learning tools and unfortunately, the buzzwords weren't quite as visible back then and I think in a lot of regards, the capabilities that we have in that space, the real revenues that we're driving off of our machine learning approaches and the value of that part of our technology portfolio, maybe hasn't gotten as much visibility as in the past. We have -- over these years, AI solutions, machine learning solutions are only as good as the data throughput that it's been used for training and development of those approaches. And we have a rich history of both public and as well through our partnership with large pharma and availability of their internal data, seen data throughput AI solutions that make it -- make them as accurate as any out there. And so not that we want to tattoo AI on our forehead, but I think if there's anything underappreciated it's the fact that, that is a key part of our technology that we have in the marketplace today and aren't in a position where we're just developing it for the future.

Got it. Appreciate that, Shawn, very clear. With that, I want to thank you for participating. I want to thank you for joining us. Investors, I want to thank everyone for listening in. Hopefully, it was a fruitful conversation for you as well. And I want to wish you the best of the luck, Shawn.

Very good. Thanks, Michael.