Simulations Plus (SLP $4.25) reported a remarkable degree of success with a demonstration project. The company is a leading provider of simulation software used by pharmaceutical companies to identify promising drug candidates. The technology enables scientists to try large numbers of prospective molecules against specific disease targets. Those tests need to be done in the laboratory otherwise, a slower and more expensive process. Simulation Plus's systems measure a variety of practical issues, as well, like how successful the drugs will be traveling through the stomach. Despite the high potential, adoption rates have been grudging throughout the pharmaceutical industry. In an effort to accelerate demand Simulations Plus recently conducted a test of its own, running its software to identify promising candidates to treat malaria. Seven potential molecules were selected. Those designs were sent to an independent laboratory, which manufactured them.
Four out of the first five tested showed positive results. The final two molecules still are being produced and will be tested shortly. One of the created molecules showed particularly strong efficacy, potent enough that it could be considered for further testing as a therapeutic agent. The others probably aren't going to be commercialized. But as a demonstration of the technology, those molecules provide a lot of supporting evidence that the company's software in fact does zero in on specific targets. Simulations Plus thinks the final two molecules, which are still being synthesized, could prove even more effective.
Conceivably, the test could result in a malaria treatment. That's a real possibility based on the initial results. Even if that doesn't happen the fact that a bunch of software engineers could come that close on a lark could open some eyes to the technology. Simulation has penetrated less than 5% of its potential market to date. This is a compelling story that could help Simulations Plus accelerate its sales growth. At present the company is expanding license income about 15% annually. Comparisons are skewed because it sold off a non core subsidiary last year. That unit operated around break even, so earnings comparisons are okay. But that operation did generate about 25% of total revenue through the end of fiscal 2011 (August). So sales numbers will be convoluted through end of the current fiscal year.
If nothing else, we think consulting revenue will increase. Hence our 20% revenue growth target for fiscal 2013. Simulations Plus has a third leg of the stool coming on line, moreover, so faster expansion is possible. The company has been collaborating with the F.D.A. to computerize toxicology testing and analysis. The Government itself may walk away from the project. But if the technology is productive there's a good chance personal care, food, and drug producers might implement the software to minimize risk.
Simulations Plus recently implemented a $.05 a share quarterly dividend. That provides a nice underpinning to the stock price. Better than that is the company's 95% renewal rate. The only renewals it doesn't get are companies that get bought out or go out of business. Cloud computing companies are in high popularity these days, not because of the technology, but because of the pricing model. Simulations Plus lets its customers use the software on-site. But it does price like a cloud company (one-year subscriptions). Unlike most of its compadres, Simulations already has reached profitability. In fact, pretax margins now are running at about 50% following the sale of the non-core business.
Management owns 40% of the stock. These shares have the potential to rise substantially from current levels.
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