Wednesday, January 11, 2012

Simulations Plus ( Nasdaq - SLP ) -- Smooth Transition

Simulations Plus (SLP $3.00) appears on track to report excellent on target Q1 (November) results.  The company is the leading provider of software used by pharmaceutical companies to simulate the performance of prospective drug candidates.  The technology steers research in productive directions, saving money and speeding up time to market.  Simulations Plus sold an unrelated subsidiary in the period, netting an estimated $1.5 million after taxes and expenses.  That unit accounted for approximately 25% of sales but was marginally unprofitable.  Earnings are likely to keep following the progression they were on prior to the sale, despite the reduction in total sales volume.  Excluding one time charges we estimate non-GAAP income (excluding stock option expense) rose 25% in the quarter to $.05 a share.  For the entire year a 22% pick-up remains achievable.

New products are in the pipeline.  Existing software packages are being enhanced with more science, faster performance, and more convenient database connections and user interfaces.  Entirely new programs are in development, as well.  Introduction could come in early fiscal 2013 (August).  Simulations Plus also is putting its technology to work in real life demonstrations.  A recent effort used the software to identify eight promising drug candidates for malaria.  Those designs now are being produced by an outside lab.  Testing on actual malaria germs is slated for Q3 (May).  The company doesn't expect a perfect cure to be achieved.  But if the computer generated molecules are active, the effort could serve as a compelling marketing tool by demonstrating the technology's ability to quickly identify promising compounds.

Cash flow remains positive.  Simulations Plus sells its software using a recurring revenue model where customers renew their licenses one year at a time.  Organic growth has been running about 15% a year in the software business.  That trend appears sustainable.  Margins could widen on further volume gains, freeing cash for acquisitions, share buybacks, and dividends.  The company itself represents an attractive takeover candidate, moreover, in light of its reliable cash flow generation, growth prospects, and competitive position.

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