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Simulations Plus: Profit Margins at a 10-Year High
Posted by: Mark Lin
(IP Logged)
Date: December 14, 2012 11:25AM
Headquartered in Southern California, Simulations Plus, Inc. (SLP) is a premier developer of groundbreaking drug discovery and development simulation and modeling software, which is licensed to and used in the conduct of drug research by major pharmaceutical, biotechnology, agrochemical, and food industry companies worldwide. It also provide a productivity tool called Abbreviate! for PCs as well as an educational software series for science students in middle and high schools known as FutureLab. Valuation SLP currently trades at a trailing 12 months P/E of 24.59 and a trailing twelve months EV/EBITDA of 12.94. Its current P/E valuations are at a 21% premium to its five-year average P/E of 20.22. SLP achieved a 19.3% ROE for the past 12 months and a five-year average ROE of 8.3%. As seen from the P/E-ROE comparisons chart below, SLP is trading above its historical average P/E valuations, with its P/E currently above ROE, suggesting unattractive valuations. SLP P/E-ROE Comparison  SLP is profitable and free cash flow positive for every single year in the past decade, and both earnings and cashflows are on an upward trajectory. Gross profit margins, EBITDA margins and net margins are also growing steadily, with all three profit margins at a 10-year high. SLP Earnings-Cash Flow Comparison  SLP Profit Margins Analysis  Financial and Business Risks SLP is debt-free with net cash of $12.7 million representing 18% of its current market capitalization of $68.2 million. SLP indicated that its other products in the chem informatics or software side of the business, MedChem Studio, MedChem Designer and ADMET Predictor/ADMET Modeler operate in a more competitive environment and compete with simulation or modeling software companies and in-house development teams at some of the larger pharmaceutical companies. SLP has not done any acquisitions of any pharmaceutical software and services businesses for in the past few years. It claims that earlier attempts to acquire other companies have not been successful either in arriving at mutually agreeable terms and conditions, or because of deal breakers discovered during its due diligence process. Business Quality and Capital Allocation Management believes its flagship software in its simulation side of the business such as GastroPlus and DDDPlus do not face significant competitive threats at the moment. GastroPlus, SLP's largest source of revenues, simulates the absorption, pharmacokinetics, and pharmacodynamics of drugs administered to humans and animals, and is currently counts pharmaceutical companies, the FDA, the U.S. National Institutes of Health, and other U.S. government agencies as its users. This is supported by the fact that SLP was the only non-European company to be invited to participate in the European Innovative Medicines Initiative program for Oral Bioavailibility Tools, a collaboration among over twenty industry, academic and government organizations working in the area of oral absorption of pharmaceutical products. DDDPlus simulates in vitro laboratory experiments used to measure the rate of dissolution of the drug and is used by formulation scientists in the industry and the U.S. Food and Drug Administration. SLP derived more than 70% of its fiscal 2012 revenue from existing customers, so it is maintaining a good balance between renewal revenues and new business. SLP's pharmaceutical software is licensed on an annual basis, and it is seeing both new licenses and license renewals for its flagship product for GastroPlus in 2012. Management estimates market share for GastroPlus to exceed 50%, although the large number of private companies make data accuracy a challenge. SLP commenced dividends in 2012 with quarterly dividends of five cents each and currently sports a dividend yield of 4.6%. Disclosure The author does not have a position in any of the stocks mentioned.
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