Research Report – Update · 2017. Biosimulation market growth is segmented into software and...

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Research Report – Update Investors should consider this report as only a single factor in making their investment decision.

Simulations Plus, Inc. Rating: Buy Howard Halpern SLP $17.65 — (NasdaqCM) April 27, 2018 2016 A 2017 A 2018 E 2019 E Net sales (in millions) $20.0 $24.1 $28.2 $31.0 Earnings per share

2015 A $18.3 $0.23 $0.29 $0.33 $0.48 $0.51

52-Week range $18.00 – $11.00 Fiscal year ends: August Shares outstanding a/o 4/9/18 17.3 million Revenue/shares (ttm) $1.55 Approximate float 11.7 million Price/Sales (ttm) 11.4X Market Capitalization $305 million Price/Sales (2019) E 10.1X Tangible Book value/shr $0.51 Price/Earnings (ttm) 36.8X Price/Tangible Book NMF Price/Earnings (2019) E 34.6X Annual Dividend $0.24 Dividend Yield 1.4% Simulations Plus, Inc., based in Lancaster, CA, develops drug discovery/development software, and provides preclinical/clinical consulting for regulatory submissions. Key Investment Considerations:

Maintaining Buy rating and increasing 12-month price target to $20.50 per share from $18.75 due to a higher FY19 EPS forecast and sector valuation. SLP’s long-term growth should be driven by the increased use of software tools and consulting analytics for drug discovery, as well as the expansion, integration, and development of new products from its Cognigen and DILIsym Services subsidiaries. In 4Q17, SLP acquired North Carolina based DILIsym Services, Inc., a provider of drug-induced liver injury simulation software and related consulting services. In 1H18, DILIsym contributed revenue of $2.1 million on gross margin of 64.2%. SLP has penetrated nearly 20% of the pharmaceutical, biotechnology, and generic companies that would be potential users of its software and/or consulting services. In 2Q18, consulting and training revenue increased 83% reflecting ongoing projects with 26 companies and two FDA funded collaborations. 2Q18 EPS (reported 4/9/18) was $0.19, on a 28.9% rise in sales to $7.4 million. We forecasted sales of $7.4 million and EPS of $0.11. In the year-ago period, SLP reported EPS of $0.07 on sales of $5.7 million. 2Q18 EPS reflects a $1.5 million or $0.08 per share tax benefit due to the 2017 tax reform act. For FY18, we increased by $0.08 our EPS projection to $0.48 on sales growth of 17% to $28.2 million (prior was $28.5 million). Our EPS forecast reflects the 2Q18 tax benefit. Our FY19 EPS projection increased to $0.51 (prior was $0.50) on sales growth of 9.8% to $31 million (prior was $31.1 million). Our EPS growth forecast reflects an increase in software customers and consulting services projects, as well as a lower tax rate of 21% from our prior forecast of 29.2%.

Simulations Plus, Inc.

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Investment Recommendation Maintaining Buy rating due to SLP’s growth potential, which should be sustained by the increasing use of software tools and analytics for drug discovery and development and leveraging the acquisitions of Cognigen Corp (FY15) and DILIsym (4Q17). The collaboration between Cognigen and SLP scientists has resulted in new and innovative solutions for its clients’ research and development programs. The company anticipates similar collaborations to occur in 2H18 between DILIsym, SLP, and Cognigen scientists. The acquisitions and growing client base for software products and analytical consulting services should underlie net income growth through FY19. We forecast income growing nearly 28% in FY19 (see chart above – excludes in 2018 a $1.5 million one-time tax benefit from the 2017 tax reform act signed into law). In FY16 and FY17, growth was driven by the addition of 75 and 88 new customers or new departments within existing customers, respectively, and the acquisitions of Cognigen and DILIsym. In FY18 and FY19, we project the Simulations division in Lancaster, CA should add 88, and 122 new customers or new departments within existing customers, respectively. FY19 growth should be driven by the next version of PKPlus that was released in January 2018. The PKPlus update incorporates all the feedback received from its current evaluation customers. PKPlus is a low cost offering that should extend SLP’s reach to pharmaceutical industry scientists so they can generate the analyses and output needed to begin the process of satisfying regulatory agency requirements. Also driving growth is the April 2017 agreement with Quantum Bio Solutions of Korea that opens up potential sales to over 40 pharmaceutical, biotechnology, and commercial organizations in Korea, and the 4Q17 acquisition of DILIsym. We are increasing our 12-month price target to $20.50 per share from $18.75 due primarily to an increase in our FY19 EPS forecast and expanded sector valuation. Our price target and dividend yield imply a total year-ahead return of nearly 18%. According to MSN Money and Reuters, the average trailing-twelve month P/E multiple for the medical diagnostics and research, and advanced medical technology sectors is 41X (prior was 39.6X). SLP’s FY19 P/E multiple is 34.7X (prior was 32X) based on our FY19 EPS forecast of $0.51 per share. We applied a multiple of 40X (prior was 39.6X) to our FY19 EPS forecast to obtain a year-ahead value of approximately $20.50 per share. Simulations Plus shares are suited for investors seeking exposure to a microcap software company targeting research scientists in the pharmaceutical, biotechnology, and drug development sectors.

Overview The company’s simulation software (see description on page 4) assists pharmaceutical scientists in rapidly predicting certain key potential drug dynamics and compound properties, thereby reducing the risk of multi-million dollar clinical trial failures, and reducing the time to market of effective new medications. Pharmaceutical software and consulting services sales growth is driven by the company’s technical and research and development staff, which increased to 67 at August 31, 2017 from six in FY06. The company added at least nine new professionals to its technical and research and development staff in FY17. Simulations Plus, Inc., based in Lancaster, California, employs 39 Ph.Ds. in their respective science or engineering disciplines, and 19 employees hold one or more Master’s degrees. In FY17, net sales consisted of annual site license revenue from pharmaceutical software ADMET Predictor™, DDDPlus™, GastroPlus™, MembranePlus, and consulting services provided by the company’s life sciences team. In August 2016, the company launched its PKPlus software that provides a user-friendly analysis enabling scientists to model and predict complex in-vitro experiments. SLP launched the next version of PKPlus in January 2018.



In FY15, the company acquired its Buffalo, NY division (Cognigen). Founded in 1992, Cognigen was the first contract research organization to offer pharmacokinetic (the study of the bodily absorption, distribution, metabolism, and excretion of drugs) and pharmacodynamic (the study of the action or effects of drugs on living organisms) modeling simulation services to the clinical pharmacology sector. This division has provided active modeling and simulation support for 74 projects in FY17 and generates revenue from services provided to customers during Phase I through IV of clinical drug development. Over the last five years, approximately 25% of its projects have resulted in direct regulatory interaction. Cognigen’s new product is KIWI (the process pictured below right), which will enable customers access to its internally developed robust computing and modeling simulation system that allows for the submission of complicated modeling runs. The KIWI platform obtained its first large scale contract in April 2016. The $4.7 million five-year contract with a major (undisclosed) research foundation provides KIWI’s cloud-based collaboration platform for the foundation’s global teams engaged in model based drug development. In November 2017, two KIWI platforms were deployed to new customers. In June 2017, SLP acquired DILIsym Services, Inc. a provider of Drug Induced Liver Injury (DILI) modeling and simulations software and contract research services. DILIsym’s software also provides analysis of potential drug-induced liver injury, as well as a simulation program for analyzing nonalcoholic fatty liver disease called NAFLDsym. The difference between DILIsym and NAFLDsym is that the former estimates the potential for a particular drug molecule to induce liver injury, while the latter estimates the likelihood of new molecules to treat nonalcoholic fatty liver disease, and is unique to the mechanisms involved in such treatment. In 2011, the initial partnership consisted of 17 pharmaceutical companies to develop DILIsym. Approximately $7 million has been invested to produce the software. Partnership members provide compounds, data, and conduct experiments to support the development effort. The partnership is moving into its third stage of its software lifecycle with contract renewals from pharmaceutical companies (see chart above) expected to occur over the next two years (2018 to 2020). DILIsym Services is focused on adding new science and features to its software including adaptive immune components, new simulated populations, and advanced integration with SLP’s GrastroPlus software.

Source: company reports

Source: November 2017 Presentation

Pharmaceutical Partnerships Develops DILIsym Software



R&D Budget Pressures – Simulation Tools to the Rescue

A strategic shift in drug development should drive the use of simulation software tools. In the 2018 global life sciences outlook (latest available) published by consulting firm Deloitte, global R&D spending within the pharmaceutical industry is projected to grow annually by 2.4%, reaching $181 billion in 2022, up from $156.7 billion in 2016. To enhance productivity in drug development, technologies employed by scientists and engineers in laboratories are expected to continuously evolve over the next several years.



Biosimulation (use of computer aided simulation of biological processes and systems) market growth reflects the cost and time spent on drug discovery and development programs and the failures of drug candidates. Regulatory agencies in the US and Europe are using and promoting the use of predictive technologies in order to streamline the drug approval process, reduce R&D costs, and potentially eliminate late stage drug failures. In January 2018, market research firm marketsandmarkets.com published a report that indicates the global biosimulation technology market to grow annually by 15.9%, reaching $2.9 billion by 2022, up from an estimated $1.4 billion in 2017. Biosimulation market growth is segmented into software and services and in 2017, the biosimulation software segment accounted for the largest share of the market. Driving market growth is the adoption of biosimulation software by pharmaceutical and research organizations and the increasing R&D investment for pharmaceutical research. The analysis by Industrial Research Institute and the biosimulation market forecast suggest sales gains by SLP’s simulation software tools such as GastroPlus, ADMET Predictor/Modeler, DDDPlus, and ClassPharmer. In the very early stage of drug development, these tools can help determine whether or not to proceed with continued development of a potential drug candidate. SLP software tools that enable clinicians to meet clinical trial endpoints could potentially save millions of dollars, especially if a simulation software tool detects a failure prior to Phase III testing. Pharmaceutical and biotechnology companies continue to seek innovative alternatives to lower the cost of drug development and submission processes to regulatory agencies. Simulation software should be increasingly important in reducing costs and increasing productivity as R&D budgets shrink. Simulations Plus software can increase productivity and reduce the risk of failure in late stage clinical trials, as the prediction and data mining models can provide the researcher with a better understanding of drug reactions in the human body, enabling a more informed go/no-go decision. Since 2015, the company’s consulting services and results from its software tools have been part of at least 50 submissions to regulatory agencies around the world. The agencies include the US Food and Drug Administration (FDA), the the European Medicines Agency in Europe, the Medicines and Healthcare products Regulatory Agency in England, as well as other FDA equivalent agencies in other countries primarily in Asia. Strong Growth Prospects We project sales and net income growth through FY19 due to the acquisitions of Cognigen and DILIsym Services, new software offerings MembranePlus and PKPlus, funded collaborations with the FDA, the first large scale KIWI contract, and smaller KIWI contracts (total number of contracts increased to 11, up from six in 1Q17), as well as an increasing number of consulting contracts and the continuing pressure on pharmaceutical and biotechnology companies’ R&D budgets, and the increasing usage of simulation tools by global regulatory agencies. Strategic Opportunities The company is evaluating cloud computing as a means of providing its software and services to customers. If implemented, it would provide the company with recurring monthly revenue and the potential to enhance margins. The 4Q17 acquisition of DILIsym Services brought a software program that is a mechanistic mathematical model looking at activities going on inside liver cells to determine all of the effects that cause damage to the liver in a variety of mechanisms. What might be the most significant long term aspect of this acquisition is that currently SLP has tools that look at cells from the outside, where as DILIsym software looks at the actions of cells from the inside. This should enable SLP to develop new end-to-end analytical services for current and new clients. In FY18, DILIsym is working on one significant project that should enable enhancement of the software’s capabilities for future consulting projects, as well as finalizing a new proposal for development of software focused on drug-induced kidney injury that will extend DILIsym’s capabilities beyond the liver.



Industry Dynamics IBISWorld projects total US Scientific R&D spending through 2023 to grow 1% annually reaching $144.9 billion, up from $135.6 billion in 2017. Based on IBISWorld’s April 2018 forecast for the Scientific Research and Development industry, if the percentages for biotechnology, pharmaceutical, and other (28% total – see chart below) hold, 2023 spending on those three categories should approximate $40.5 billion, up from $38.8 billion forecast for 2018 (or 28% of $136.9 billion forecasted). Growth should be driven due to the increased outsourcing to companies with specialized skill sets. Fundamentals SLP’s sales growth is driven primarily by participation of its life science and market teams in large and small conferences around the world. Making in excess of 25 presentations at global conferences resulted in the company’s database of over 2,000 potential customers, which grows approximately 20% annually. We project annual customer additions should reach 122 in FY19. Along with customer additions, we anticipate more complex, higher value consulting projects due to the collaborative efforts between SLP, Cognigen, and DILIsym science teams. In FY19, we anticipate analytical consulting services to reach at least 53% of total sales, up from approximately 37% in FY17. Customers evaluate software and then obtain approvals from multiple decision makers prior to a purchase, a process that can take up to six months. Company data suggest that once a customer purchases a license, the account renewal rate in the following year is approximately 85% with the revenue renewal rate of at least 90%. In 2Q18, the company’s Cognigen subsidiary had 62 projects (including 19 new projects) from 25 companies, of which two were with new companies and 11 projects expanding. Partly offsetting the progress made by Cognigen was three projects having their scope reduced. Cognigen had 41 outstanding proposals with 28 companies. In 2Q18, the company’s DILIsym subsidiary worked on 20 consulting projects (including two projects from its NAFLDsym software) and has nine active consortium contracts. Operations For FY18, we project 17% sales growth to $28.2 million (prior was $28.5 million), reflecting 4.6% growth at its Cognigen division and a 6.3% increase in software and consulting services performed at the simulation and software division, as well as $4 million in sales for DILIsym Services (a $437,000 decrease from our prior forecast reflecting 1H18 results). Our total growth forecast reflects the April 2017 agreement with Quantum Bio Solutions of South Korea that is expanding the company’s potential customer base to over 40 organizations, up from the six organizations that have licenses to use SLP’s simulation software tools. We anticipate analytical consulting services increasing nearly 63% to $14.5 million or 51.2% of total sales, up from $8.9 million or 36.7% of total sales. For FY19, we project 9.8% sales growth to $31 million (prior was $31.1 million), reflecting $4.6 million in sales from DILIsym (up from $4 million forecasted in FY18), the addition of 122 customers reflecting SLP’s PKPlus software offering attracting new customers after version 2 is launched in 2H18, and customer conversion in Asia from the April 2017 agreement with Quantum Bio Solutions, as well as an 11.5% increase at its Cognigen division to $8.5 million. We anticipate analytical consulting services increasing 13.5% to $16.4 million or 53% of total sales, up from $14.5 million or 51.2% of total sales in FY18. Consulting services will be driven by growth at the Cognigen division, which will be enhanced as DILIsym’s capabilities are merged into SLP’s current services offering at its divisions in California and North Carolina.

2018 Revenue Forecast $136.9 Billion



The table below outlines the cost structure we anticipate for fiscal years 2018 and 2019 vs. 2017 results. Cost Structure

Margin Analysis 2017A 2018E 2018E 2019E 2019E Actual Prior Current Prior Current

Gross Profit 73.9% 75.0% 72.3% 75.8% 73.3% SG&A expenses 34.0% 33.5% 33.8% 31.3% 31.4% R&D expenses 5.7% 5.0% 5.8% 4.4% 4.8% Operating income 34.2% 36.5% 32.7% 40.1% 37.0% Tax rate 29.8% 31.8% 6.8%* 29.2% 21.0%

Source: Taglich Brothers estimates and company reports *Includes a $1.5 million tax benefit in 2Q18. Our gross margin projection reflects 2018 and 2019 Cognigen margins of 59%, and 62%, respectively, vs. 81.5% and 82%, respectively for the simulations division. We estimate newly acquired DILIsym will have gross margin of 59.8% in FY18, which should increase to 60.1% in FY19. For SLP, our gross margin forecast reflects the May 2014 acquisition of intellectual property from TSRL. While the acquisition eliminated royalty payments to TSRL on sales of GastroPlus, SLP will incur $600,000 in annual amortization costs due to the purchase of those rights for $6 million. Cognigen’s gross margins reflect the $4.7 million five-year KIWI contract that diminish margins over the first year of the contract due to infrastructure requirements and slowly improve through FY18 and FY19. Our gross margin for DILIsym reflects 1H18 results. For the next two fiscal years, we project SG&A margins of 33.8% and 31.4%, respectively, and R&D margins of 5.8% to 4.8%, respectively (see table above). Our operating expense forecasts reflect new marketing initiatives in order to obtain and support new customers and expand the functionality of SLP’s software programs, as well as the operations of its Cognigen division. Additional expense will include the integration and innovation of the software products from the newly acquired DILIsym Services division. SLP is increasing its support for workshops and training sessions in Germany, Korea, India, New Jersey, and at customer sites. The company should maintain its global participation in scientific meetings, conferences, and poster presentations, as well as look to hire qualified scientists to increase its scientific team. In FY18, SG&A expense should increase 16.4% to $9.5 million with R&D expense increasing $277,000 at $1.6 million. SG&A in the year-ago period included approximately $620,000 in one-time costs to acquire DILIsym Services. We project operating expense margin decreasing to 38.4% from 39.6% in FY17 due to increasing productivity of scientists stemming from increased analytical consulting services activity. We project 11.8% operating income growth to $9.2 million with operating margin of 32.7%. We increased our net income forecast to $8.5 million or $0.48 per share from $7.1 million or $0.40 per share due primarily to the $1.5 million income tax benefit recorded in 2Q18. In FY19, SG&A expense should be flat at $11.2 million reflecting a 2.1% increase in SG&A expense to $9.7 million, offset by a $145,000 decrease in R&D expense to $1.5 million. The increase in SG&A expense reflects spending to build and maintain its three operating divisions in California, New York, and North Carolina. We project operating expense margin decreasing to 36.3% from our forecast of 39.6% in FY18 due to the acceleration of scientists’ productivity across the company’s software and analytical consulting services platforms. We project 24.1% operating income growth to $11.5 million with operating margin of 37%. We are increasing our net income projection to $9.1 million or $0.51 per share from our prior forecast of $8.9 million or $0.50 per share. Due to the tax reform act passed into law at the end of 2017, the company anticipates its tax rate to be in the low 20% area. In FY19, we project a tax rate of 21% compared to 23.2% (excluding the $1.5 million one-time tax benefit recorded in 2Q18) in FY18. Finances For FY18, we project cash earnings of $12 million and an increase in working capital of $4.3 million due primarily to decreases in deferred tax accruals and increases in receivables. Cash from operations of $7.7 million



should cover software development costs and common stock dividends, increasing cash by $1 million to $7.2 million at the end of FY18. For FY19, we project cash earnings of $12.4 million and an increase in working capital of $956,000 due primarily to an increase in receivables and a decrease in deferred revenue. Cash from operations of $11.4 million should cover software development costs, contingent payments to DILIsym, and common stock dividends, increasing cash by $1.8 million to $9 million at the end of FY19. 2Q18 and 1H18 Results 2Q18 Sales increased 28.9% to $7.4 million due primarily to revenue of $938,000 from its North Carolina DILISym subsidiary acquired on June 1, 2017, a 12.6% increase in its Lancaster, CA division to $4.6 million stemming from a $400,000 increase in software and software-related sales reflecting 15 new customers consisting of 8 commercial clients and 7 nonprofit groups. The company’s Buffalo subsidiary (Cognigen) increased sales by 12.3% to $1.9 million due primarily to engagements with two new companies. Included in total sales was a $1.3 million increase in consulting and analytical study revenues due primarily to 28 on-going projects at the company’s Lancaster, CA, division. Gross profit increased 26.2% to $5.2 million due primarily to higher sales, partly offset by gross margins contracting to 71.2% compared to 72.8% in the year-ago period. Gross margin for the software and services division was 81.7% versus 82%, while SLP’s Cognigen division had gross margin of 53.5% compared to 50.3% in the year-ago period. The recently acquired (June 1, 2017) DILIsym Services had gross margin of 55.9%. Gross margin contraction was due primarily to significant increases in direct contract expenses paid for testing at DILIsym. Operating expense margin improved to 38.4% from 41.3% due to a sales growth of 28.9%, which exceeded the 19.8% increase in operating expenses to $2.8 million. SG&A expense increased 20.1% to $2.3 million and R&D expense increased $75,000 to $484,000. The increase in SG&A expense includes higher contract labor ($26,000 increase), insurance ($87,000 increase), payroll taxes ($67,000 increase), amortization expense ($53,000 increase) due to the amortization of DILIsym intangibles, and salaries and wages ($89,000) reflecting increased stock compensation, salaries at the company’s new subsidiary, DILIsym, and annual salary increases and increased head count in Lancaster and Buffalo. Partly offsetting the increase in operating expense was a $75,000 decrease in legal fees reflecting a reduction in document review. Operating income increased 34.7% to $2.4 million due to higher sales and leveraging of operating expenses, partly offset by gross margin contraction. Other expense was $33,000 compared to an expense of $10,000 in the year-ago period. The increase in other expense stems from contingent consideration (imputed interest) of $38,000 compared to none in the year-ago period, as well as less than a $1,000 currency exchange loss compared to a loss of $14,000 in 2Q17. Net income was $3.5 million or $0.19 per share compared to $1.2 million or $0.07 per share. The company recorded an income tax benefit of $1.1 million compared to an expense of $589,000 in the year-ago period. 2Q18 income taxes reflects a one-time $1.5 million tax benefit stemming from estimating future deferred liabilities at lower tax rates under the newly enacted tax laws at the end of 2017. We projected net income of $1.9 million or $0.10 per share on sales of $7.4 million. 1H18 Sales increased 29.7% to $14.4 million due to a $726,000 increase in software and software-related sales stemming from 36 new customers consisting of 19 commercial clients and 17 nonprofit groups. Sales growth was enhanced by a $2.6 million increase in consulting and analytical study revenues due primarily to the company’s Buffalo subsidiary (Cognigen) and North Carolina subsidiary (DILISym). Gross profit increased 28.4% to $10.6 million due to higher sales, partly offset by gross margin compression to 73.3% from 74%.



Operating expense margin decreased to 38.8% from 40.6% due to a sales growth of 29.7%, which exceeded the 24% increase in operating expenses to $5.6 million. SG&A expense increased 24.6% to $4.7 million and R&D expense increase $146,000 to $845,000. Operating income increased 33.8% to $5 million due to higher sales and leveraging of operating expenses, partly offset by gross margin contraction. Other expense was $79,000 compared to income of $29,000 in the year-ago period. The negative change in other income stems from a currency loss of $13,000 from a currency gain of $20,000 in 1H17 and contingent consideration (imputed interest) of $77,000 compared to none in the year-ago period. In 1H18, net income was $5.2 million or $0.29 per share compared to $2.6 million or $0.15 per share.

Finances In 1H18, cash earnings of $6.9 million and an increase in working capital of $2.9 million resulted in cash from operations of $4.1 million. The increase in working capital resulted from increases in receivables and revenue in excess of billings and decrease in accruals. Cash from operations covered capital expenditures and common stock dividends, increasing cash by $705,000 to $6.9 million. Strategy SLP aims to increase its visibility and customer leads by having their life science team members attend conferences and scientific meetings worldwide. In FY17, the company attended 28 scientific conferences, presented 20 posters and oral podium presentations, and hosted eight webinars on modeling and simulation applications, as well as holding 10 global workshops. We anticipate the company will maintain or exceed the levels achieved in FY17 through FY19. The company aims to expand its contract research, consulting, and workshop services offered to the industry. In FY17, Simulations Plus engaged with 44 new commercial clients on projects and had 23 consulting projects along with two FDA collaborations. In 1Q18, the company engaged 21 new clients and was working on 24 projects at its Lancaster, CA division with proposals out for eight projects. Contract research and consulting is a marketing tool since it demonstrates the capabilities of the company’s life sciences team and simulation tools, which often lead to site licenses for its software offerings. Simulations Plus should continue its practice of to seek funded research consulting agreements with government agencies and commercial pharmaceutical companies. SLP has a five-year collaboration agreement with the Food and Drug Administration Center for Food Safety and Applied Nutrition. SLP is in the final year of an agreement to build toxicity models and avoid the cost of creating it own database. SLP has a five-year agreement with the FDA’s Office of Generic Drugs to evaluate mechanistic in-vitro/in-vivo correlations, and an approach to determine whether mechanistic absorption modeling correlates laboratory dissolution experiments with the in-vivo behavior of dosage forms better than traditional empirical methods. The company finished its third year of a research collaboration agreement with the FDA to enhance its Ocular Compartmental Absorption and Transit model within the Additional Dosing Routes Module of GastroPlus to provide a tool for generic companies and the FDA to assess the likely bioequivalence of generic drug formulations dosed to the eye. In 1Q16, SLP entered into a research collaboration agreement with the FDA to expand the capabilities of GastroPlus to simulate the dosing of long-acting injectable microspheres. The agreement was renewed for its third year in September 2017.



Competitive Landscape Pharmaceutical companies conduct drug discovery and development efforts through internal development staffs and outsourcing some of this work. Smaller companies need to outsource a greater percentage of this research. SLP also competes with the in-house development teams at some pharmaceutical companies. Drug makers have turned to innovative drug treatments that serve an unmet need in order to get regulatory approval. In 2015, the FDA approved 45 novel drugs, four more than in 2014 and the most since the all-time record of 53 set in 1996. In 2016, FDA approvals fell to 22, the lowest number since 2010. However, 2017 approvals by the FDA rebounded to 46, which does not include the first of a new wave of cell and gene therapies that were approved under a separate category. In 2017, the FDA has taken advantage of policy changes implemented in recent years to accelerate the drug approval process that includes a breakthrough therapy designation cutting review times. Also in 2017, European regulators recommended 92 new drugs including generics, up from 81 in 2016, and China has laid out plans to speed up its approval process. The company’s pharmaceutical software and services business competes against companies that provide more extensive and higher cost screening, testing, and research services, and products that are not based on simulation software. There are also software companies whose products do not compete directly, but are related. We were unable to find other companies that might pose a competitive threat to GastroPlus, DDDPlus, and/or MembranePlus. Those simulated software offerings appear to be unique. ADMET Predictor/ADMET Modeler operates in a more competitive environment; however, independently published product comparisons have been very favorable, with ADMET Predictor consistently ranked first in predictive accuracy. Risks Technology The software industry is highly competitive and changes rapidly. The company's operating results could be significantly affected by its ability to maintain and increase acceptance of its products. Shareholder Control Walter Woltosz, co-founder, chairman of the board, president, and CEO, and Virginia Woltosz, co-founder, corporate secretary, and treasurer, own 31.8% of the outstanding voting stock (based on SEC filing in December 2017). Walter and Virginia Woltosz might greatly influence the outcome on all matters requiring stockholder approval in ways that may not be in the best interests of other shareholders. Intellectual Property Rights Third parties may infringe on or misappropriate IP rights, or otherwise independently develop substantially equivalent products and/or services. The loss of intellectual property protection or the inability to secure or enforce intellectual property protection could harm its business and/or ability to compete. Foreign Exchange While nearly all of SLP’s transactions are denominated in US dollars, approximately 27% of sales were to Asian customers in FY17. In Japan and China, the company receives payment in Yen and Yuan, respectively. If foreign currency transactions increase significantly, the company may engage in hedging in order to mitigate risk. So far exchange rate exposure has had no material impact. Miscellaneous Risk The company’s financial results are subject to other risks and uncertainties including competition, operations, financial markets, regulatory risk, and/or other events. These risks may cause actual results to differ from expected results. Trading Volume Liquidity is a potential concern. Based on our calculations, the average daily-volume during calendar 2016 was 55,300 a day. In 2017, average daily volume dipped to 53,700, and over the last three months (ending April 26, 2018) was 55,100. SLP has 17.3 million shares outstanding and a float of approximately 11.7 million. Investors should by aware that a thinly traded equity could experience price volatility.

Simulations Plus, Inc. Consolidated Balance Sheets

FY2015 –FY2019E (in thousands)


Source: Company reports and Taglich Brothers estimates

Simulations Plus, Inc. Annual Income Statement Model

FY2015 – 2019E (in thousands)



Simulations Plus, Inc. Quarterly Income Statement Model

FY2017 to 2019E (in thousands)



Simulations Plus, Inc. Cash Flow Statement FY2015 – FY2019E

(in thousands)





Price Chart

Taglich Brothers Current Ratings Distribution

Investment Banking Services for Companies Covered in the Past 12 Months Rating # % Buy 3 12 Hold Sell Not Rated



Important Disclosures

As of the date of this report, we, our affiliates, any officer, director or stockholder, or any member of their families do not have a position in the stock of the company mentioned in this report. Taglich Brothers, Inc. does not currently have an Investment Banking relationship with the company mentioned in this report and was not a manager or co-manager of any offering for the company within the last three years. All research issued by Taglich Brothers, Inc. is based on public information. The company paid for the first year of distribution a fee of $21,000 (USD) on May 2004, and since August 2005, pays a monthly monetary fee of $1,750 (USD) to Taglich Brothers, Inc. for the creation and dissemination of research reports.

General Disclosures

The information and statistical data contained herein have been obtained from sources, which we believe to be reliable but in no way are warranted by us as to accuracy or completeness. We do not undertake to advise you as to changes in figures or our views. This is not a solicitation of any order to buy or sell. Taglich Brothers, Inc. is fully disclosed with its clearing firm, Pershing, LLC, is not a market maker and does not sell to or buy from customers on a principal basis. The above statement is the opinion of Taglich Brothers, Inc. and is not a guarantee that the target price for the stock will be met or that predicted business results for the company will occur. There may be instances when fundamental, technical and quantitative opinions contained in this report are not in concert. We, our affiliates, any officer, director or stockholder or any member of their families may from time to time purchase or sell any of the above-mentioned or related securities. Analysts and members of the Research Department are prohibited from buying or selling securities issued by the companies that Taglich Brothers, Inc. has a research relationship with, except if ownership of such securities was prior to the start of such relationship, then an Analyst or member of the Research Department may sell such securities after obtaining expressed written permission from Compliance.

Analyst Certification

I, Howard Halpern, the research analyst of this report, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers; and that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report.

Public Companies mentioned in this report:

None



Meaning of Ratings

Buy – The growth prospects, degree of investment risk, and valuation make the stock attractive relative to the general market or comparable stocks. Speculative Buy – Long-term prospects of the company are promising but investment risk is significantly higher than it is in our BUY-rated stocks. Risk-reward considerations justify purchase mainly by high risk-tolerant accounts. In the short run, the stock may be subject to high volatility and could continue to trade at a discount to its market. Neutral – Based on our outlook the stock is adequately valued. If investment risks are within acceptable parameters, this equity could remain a holding if already owned. Sell – Based on our outlook the stock is significantly overvalued. A weak company or sector outlook and a high degree of investment risk make it likely that the stock will underperform relative to the general market. Dropping Coverage – Research coverage discontinued due to the acquisition of the company, termination of research services, non-payment for such services, diminished investor interest, or departure of the analyst. Some notable Risks within the Microcap Market Stocks in the Microcap segment of the market have many risks that are not as prevalent in Large-cap, Blue Chips or even Small-cap stocks. Often it is these risks that cause Microcap stocks to trade at discounts to their peers. The most common of these risks is liquidity risk, which is typically caused by small trading floats and very low trading volume which can lead to large spreads and high volatility in stock price. In addition, Microcaps tend to have significant company-specific risks that contribute to lower valuations. Investors need to be aware of the higher probability of financial default and higher degree of financial distress inherent in the microcap segment of the market.

From time to time our analysts may choose to withhold or suspend a rating on a company. We continue to publish informational reports on such companies; however, they have no ratings or price targets. In general, we will not rate any company that has too much business or financial uncertainty for our analysts to form an investment conclusion, or that is currently in the process of being acquired.

Date post:	06-Aug-2020
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Research Report – Update · 2017. Biosimulation market growth is segmented into software and...

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