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Steven Chen
Steven Chen
Articles (206)  | Author's Website |

Simulations Plus: A Pick-and-Shovel Niche to Play the Speculative Drug Discovery Space

Regardless of the success (or failure) of a new drug development, this company earns a profit

March 05, 2020 | About:

California-based Simulations Plus (NASDAQ:SLP) develops modeling and simulation software primarily for use in pharmaceutical and biotechnology research. It also provides relevant consulting and research services. Clients use the company’s products and services to guide early drug discovery, preclinical and clinical development programs.

Simulations Plus was founded by the Walter and Virginia Woltosz in 1996. The founders’ technical expertise aimed to minimize animal testing, failed clinical trials, delays and cost. Fast forward to today and the company is still founder-led and founder-owned; Walter is the Chairman and Virginia is the Secretary and Treasurer. Together, they own almost 28% of total shares outstanding, according to the latest filing.

As of fiscal 2019, software accounted for over 57% of the total sales, followed by consulting services (27%) through Cognigen, one of the company’s subsidiaries. Geography-wise, 66% of the revenue came from North America, 17% from Europe and 16% from Asia.

GastroPlus, the company’s flagship product, is currently the largest single source of software revenue. According to the company, the product is now the most widely used commercial software of its type by pharmaceutical companies, the U.S. Food and Drug Administration, the U.S. National Institutes of Health and other government agencies worldwide.

The management believes that only one significant competitor, privately owned Certara, exists alongside GastroPlus, and that other companies could encounter a high barrier of entry in this field. With a steep learning curve of simulation software in a specialized niche, customers are typically reluctant to switch. From time to time, Simulations Plus invests resources in promoting its software among pharmacy and medical students. We can observe that both new licenses and license renewals for GastroPlus continue to grow, and that the company’s market-dominant position is unshakable.

According to GuruFocus, Simulations Plus has earned super-normal annual returns on invested capital above 30% for the past decade.

Besides, the business, mainly facing non-cyclical sectors, managed to increase its top line throughout both of the last two recessions, demonstrating a recession-proof characteristic.

Going forward, we expect the service business at Simulations Plus to grow rapidly and fuel the short-to-medium-term expansion of the software counterpart. As discussed previously, drug discovery has its highly-speculative nature (as high as 95% of projects do not reach approval), and hence lacks investability in our opinion. Instead, investors may want to ride the megatrends of the aging population and healthy living through a pick-and-shovel play like Simulations Plus. In the end, no matter how the research and development pipeline works out for clients, the company earns its money from the software, research and consulting services that it provides.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.

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About the author:

Steven Chen
Steven CHEN is a quality-focused, business-perspective investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital).

Steven can be reached at [email protected], LinkedIn, or WeChat (ID: LSCHEN2005).

Also, check out his column at Smartkarma on the Asian market - www.smartkarma.com/profiles/steven-chen

Visit Steven Chen's Website


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