Simulations Plus Inc (SLP) 2010 Q1 法說會逐字稿

Happy New Year and welcome to the Simulations Plus first quarter fiscal year 2010 financial results conference call and webinar. Our Chairman and CEO, Walt Woltosz, will be presenting this afternoon. Accompanying Walt as panelists will be our Chief Financial Officer, Momoko Beran, and our Manager of Marketing and Sales, John DiBella.

This call will be recorded for playback at our website, www.simulations-plus.com. Also, there will be an opportunity for you to ask questions following the presentation. (Operator Instructions). It's now my pleasure to turn the presentation over to Mr. Walt Woltosz, Chairman and CEO of Simulations Plus.

Thank you, Renee. Let me go ahead. Sorry, everybody for the delay.

So this is our investor conference call for our first quarter of our new fiscal year, 2010, which began on September 1, and the first quarter ended on November 30. And as I'm sure everyone knows, we filed our 10-Q this morning.

So I'm going to skip a couple of the slides here to make up a little time. Safe Harbor is the same one I always read, and I think the investors are familiar with the Safe Harbor statement. It will be in the slides if you care to have a copy of the slides, you can get those by sending an e-mail to info@simulationsplus.com.

So, our first three months were a record first quarter. Gross revenues, a little over $2.4 million, up over 14% from last year's first quarter. Pharmaceutical side of the business, software and services up over 21% to $1.7 million, in a little bit from about $1.4 million last year. The Words+ subsidiary was essentially flat, it was down 0.1%, almost identical to last year.

SG&A up about 11%, but as a percent of sales it went down from 42.4% to 41.2%. The increases in SG&A were due to travel and show expenses. We've gotten very aggressive as people who have been following us know, in terms of doing a lot more shows, scientific meetings, and so those expenses, bonuses to officers, increases in salaries and benefits, healthcare benefits, all of that goes up just about every year.

R&D expense, $261,000, that's down a little bit from $269,000. So it's an $8,000 change, which is pretty small. The reason for that is we're spending, during the first quarter, spent more time on contract studies, and the salaries for the contract studies go under cost of goods sold, rather than under R&D expense. So actually, the salaries are expensed either way. It's just what you call it. And since they're not really Research and Development, they're contract studies. Then it is part of the cost of goods sold.

Income before income taxes, up 46% to $661,000, from $453,000 last year in the first quarter, and this is all from the pharmaceutical software and services revenues. Net income up 38% to $430,000 from $312,000 in last year's first quarter. And the increase in revenues of 21% on the pharmaceutical side results in an increase in income that's greater than that because once we surpass breakeven, we have pretty high margin on the software licenses, and so you see that kind of leverage where revenues can go up one amount and income, even after taxes, can go up significantly more.

Earnings per share, $0.03 a share compared to $0.02 last year, up 7/10 of a cent, so $0.03 and $0.02 are rounded off a little bit. And the good news is positive results in spite of the global economic crisis that still isn't over. It seems to be mitigating a little bit, but in our business, because I think we sell productivity tools, I think we're in kind of a good position with respect to a lot of the consolidations that have been happening in the pharmaceutical industry. And I'll address those in a few more slides from here.

We also did a share repurchase last year. We purchased a little over $1 million in shares at about $1.32 a share average. Our cash, just under $8 million now, and that's in spite of spending $1 million on the share repurchase program. So it would have been about $9 million if we hadn't done that. And that's good. Cash flow remains very strong, cash itself up 31.5% from the first quarter of last year.

And shareholder's equity up 4.8%. Again, that's in spite of spending $1 million for the share repurchases. So, if we hadn't done the share repurchases, the shareholder's equity would be higher, but of course the equity per share would be lower.

In the share repurchase program, we were authorized up to $2.5 million, and with the extension that covered from December 2, 2008, to December 1, 2009. At this time, we haven't made any plans to repurchase any additional shares. However, the Board could decide to do that at any time.

Progress on our products, and I'll take these in alphabetical order. ADMET Predictor is our molecular structure to property prediction program. We released a new version back in July with some new models, and we also developed a special module under a Pfizer funded, collaboration with Pfizer, and that is in use at Pfizer now and is part of the newest release that is out now. We added some expanded graphics, and we continue to work on our SBIR Phase II grant with the National Institutes of Health.

This is a little over half a million dollar grant that we were awarded about a year ago, little less than a year ago, and it's allowing us to further extend the rapid calculation of partial atomic charges that usually require a very time consuming quantum mechanical approach that usually does about one molecule per day. And with this new method, we can calculate hundreds of thousands of molecules per hour at an accuracy level that's good enough for the types of things that we want to do with it in predicting properties from structure.

During the last fiscal year, we also funded a series of experiments that relate to ADMET Predictor, in that we wanted to get a better set of data to allow us to model how drugs are dissolved, how soluble they are in different fluids that represent actual fluids in vivo, in the body. And there are three fluids that are primarily used for that, the fasted state gastric fluid, fasted state intestinal fluid from the small intestine, and fed state simulated intestinal fluid.

And we measured under contract with Northeastern University, 160 different drugs and drug-like compounds in each of these, and this is quite a fascinating database, very insightful. Our chief scientist gave a poster at the AAPS meeting in November, and I think we got probably five times as many business cards from people who wanted copies of the poster and are interested in what we did here.

We're going to offer these data as a new product, shortly. The cost to do the experiments was in the six figures, and we think we can sell enough of the sets of data to more than offset our investment and make a profit actually on the data itself. And so we'll do that in addition to building our own models for predicting solubility in these three different fluids.

Our second product is ClassPharmer, and this is a data mining program for chemists, and also a de novo molecule design, in other words, the ability to design brand-new molecules. We incorporated quite a few improvements during the fourth quarter, and version 4.7 was released in October during the first quarter of this fiscal year. We're continuing to enhance the capabilities of the program in both data mining and design, and to add some convenience features and visualization capabilities that our users have identified, or in some cases we ourselves have added capability that we thought would be useful.

We did add a new capability called scaffold hopping, and in the past, the way ClassPharmer was used to design new molecules was to identify the core part of the molecule, called the scaffold, and change things around the outside of that. Well, some chemists said, you know, we want to keep what's going on around the outside of the molecule and change the core part, or the scaffold. So that capability has now been added.

And we're now working on refactoring the code, which is something that everybody does now and then, when you're working on these very large programs. You go back through and kind of streamline the code, make it more efficient, use less memory, run faster, and then again add new features at the same time.

Our DDDPlus software, this is our software that simulates in vitro dissolution experiments, or laboratory dissolution experiments, and this is the only tool of its kind in the world. We brought this out, I don't know, six or seven years ago. The reaction among formulation scientists at first was, gee, what do we do with this. And now they know what to do with it, and more and more companies, and the FDA and other agencies, are licensing this. We didn't do much in the way of development on this, couple of miner bug fixes, because our staff was pretty busy on contract studies during the first quarter.

GastroPlus, our flagship product, has been continually refined, and the development of the drug-drug interaction module has continued. We expect to release version 7.0 in the next month or so, and this will be a version that will include the drug-drug interaction, as well as ocular and nasal pulmonary delivery capabilities.

The ocular delivery capability has been completed, has not been released yet. We're going to release that with version 7. That was developed under a funded collaboration with Pfizer. And the nasal pulmonary developed under funded collaboration with GlaxoSmithKline is also complete and will be released with version 7.

We continue to get consulting contracts, and interestingly, many of these are from top five companies. So, even though these companies have had the software for years and have scientists that know how to use it, either they get too busy or they end up with unique problems that are particularly challenging. And the fact that we use the software every day, where they may only need to use it on occasion, gives us an advantage. We do get to see data from a variety of companies as well, so we get to learn and hone our skills to a level that's, I think quite unique in the world for this type of study. So we are getting contract studies even from top five companies, as well as smaller ones.

I've mentioned in the last conference call that at the AAPS meeting in November, that's the American Association of Pharmaceutical Scientists, GastroPlus was mentioned by every speaker in at least three different sessions, as the tool that they had used to run the analysis that they were talking about in their presentations. And in fact, one presentation by Novartis noted that they had submitted GastroPlus Simulation results to the FDA, and the result was that the FDA agreed to eliminate a clinical trial that would have otherwise been required.

The ocular delivery is, again, that's complete now and is a multi-compartment model of the eye that's coupled to the rest of the GastroPlus model for the rest of the body. And the nasal and pulmonary delivery, same thing, it's multi-compartment model that is connected to the rest of the GastroPlus model.

So GastroPlus began in 1998, when we first released it as a simulation of absorption in the gastrointestinal tract, and now we're branching out to a number of other methods of delivering the drug to the eye, through the nose, through the lungs. We will eventually add through the skin, a derma model during this year, and we also have released recently oral cavity, so above the tongue or lingual, below the tongue or sublingual, and adhesive patch inside the cheek, which is called buccal delivery.

Words+ subsidiary, the general economy does appear to be affecting this business a bit. A lot of the states are struggling with their budgets, a large percentage of our sales do come from Medicaid, Medicare, schools, state vocational rehabilitation programs, et cetera. Our new Conversa device has been selling well. Our national sales manager has been working to improve our marketing and sales activities, and our dealer relationships. He did add two new employee reps in California during 2009.

And we do have a new product, we are not talking much about, but we made significant progress that includes a patent disclosure that we've just recently submitted with the IP owned entirely by Words+.

Some miscellaneous items. The potential acquisition we were working on for a number of months last year didn't go through, but we still remain in contact to acquire the software part of that business. The larger company that did acquire that acquisition target is interested apparently from communication I had just recently in moving forward with the software part. So we're going to see if we can complete that acquisition here in the near future. And we also have three other possibilities that we're working on in terms of doing due diligence.

We have two new PhD's that started recently and are already making very nice contributions in the work that they're doing, and we've just had another one accept our offer that will join the team on March 1. So our, I call them our elite team, is continuing to grow.

In addition, Dr. Robert Clark, we announced earlier will join the Company next Tuesday as Director of Life Sciences. His experience as Vice President of Research of a public pharmaceutical software company, I think is going to add some valuable additional leadership for the life sciences team, in addition to what we have with our chief scientist, Michael Bolger, who has been filling that role on an interim basis until Robert joins us.

Our strategy going forward, we're going to continue to expand the product line and the services, continue to expand the team. We've got some new product development projects that were in our corporate strategic plan that we haven't been able to get to those because we've just been so busy and need more people. And so we're going to invest some of our cash in continuing to expand the team and work on those projects. And also our consulting studies and funded collaborations are continuing to grow, so we need to increase the capacity of the team for that.

Seeking and completing strategic acquisitions, this is a major goal for us this year. We have had pretty slow pace at the negotiations, but we're going to push even harder and try to get at least one or two deals done in the current year. And we always watch the SBIR announcements to look for opportunities there. Both on the pharmaceutical side and on the side of the Words+ subsidiary.

For the Words+ subsidiary, we have made additional product improvements, and gotten a little more aggressive on the marketing and sales side. I mentioned adding two new California reps last year.

We've also addressed the problem that we've had in collecting old accounts receivable, largely from state Medicaid agencies, also from some private insurance. And new billing software that we've added, we went through one software program last year that didn't quite work out, and we've now switched to another one and that seems to be working. We're now actually collecting some old receivables that we weren't so sure we were going to be able to do that, but we've got a new person in that slot and she's doing a great job.

We will continue our expanded marketing and sales activities on the pharmaceutical side, as far as a number of conferences and meetings worldwide. Our chief scientists and I will be going to Israel and Dubai in about a week and-a-half for training for one of our major customers in Israel, a generic company there, a very large one, and then a four-day large pharmaceutical conference in Dubai. So we hope to make some new connections there.

We're also continuing our push into the environmental toxicology area. People have asked, what's the effect of all the mergers and so on that are going on in the pharmaceutical industry, and in fact there has been no negative effect. Our licenses, when we get renewals from the large companies, in every case that I can think of they've taken even more licenses. The same thing with academic and government organizations.

The adoption of these software technologies is still, I think relatively new compared to aerospace or automotive or other industries, and so there's, I believe a lot of growth capability still left in the big companies, and in the many medium size and smaller companies.

Government agencies are expanding. I think we had a press release here a month or two ago that the FDA just added ten more GastroPlus licenses for their use in the office of generic drugs. And smaller companies are recognizing the value, and even if they are not able to assign someone to learn to use the software, they will contract with us, and so our consulting studies business is growing and we expect to see that to continue.

So in summary, our financial strength continues, about $8 million in the bank, excellent cash, no debt. A record first quarter. I think our aggressive marketing and sales from last spring is now beginning to bear fruit. I expect that is going to continue. The Words+ subsidiary, again flat for the quarter but at least it didn't go down significantly, 0.1% is really not much. And new product developments are expected to improve the performance of this division in this year.

We're focused on maintaining our Best-in-Class position in product quality and customer service, in both of our business units. We do have an enviable reputation for superior customer service, whether it's a pharmaceutical customer or one needing an assistive technology for someone who's disabled. We've always emphasized a customer-centric approach to business, and we get tremendous positive feedback as a result.

We did recently institute, just in the last few weeks, didn't affect the first quarter, but should start seeing it going forward, a few price increases and reduced renewal discounts on the pharmaceutical side. So we expect that to add somewhat to revenues and earnings as well, and again, we'll continue to actively seek strategic acquisitions.

The slides will be available, a copy of these slides on request through info@simulationsplus.com. And now I'll take any questions.

Walt, there are several questions that have come in from Walter Ramsley. The first is, what was the Q1 renewal rate for the pharmaceutical software line?

Oh, my gosh, I should have those numbers handy. John DiBella, do you have that number?

Yes, for the first quarter, there was just one small non-profit agency that decided not to renew. So the renewal rate was on the order of 95%.

Thank you.

Okay. And his next question is, what was the Q1 sales breakdown between US and international?

Okay. That is in the Q. Momo, do you have that one handy?

Yes, I do. Hold on a second.

That's always a little tough because of the multi-national Companies like Roche and GSK and Pfizer, where you've got locations in both places, but we break it down by site as best we can.

For the Simulations Plus, the international is 740K. The Europe is 425, Asia, 315. And the rest of that is the US.

How much was the rest?

The $1.74 million.

Okay. $1.74 million was the total, right?

No, total was $1.814 million for Simulations Plus.

Oh, okay.

As a consolidated, the North America had, the American had $1.760 million, which is adding the World+ subsidiary revenue in the US soil.

Okay.

Okay. And there is another question. It is, what was the first quarter sales breakdown between new and existing pharmaceutical software customers?

John, do you have that?

Yes, I can handle that one. As a percentage of the total revenue for the first quarter, the renewal revenue was approximately 65%. The new license sales were approximately 20%.

And the other 15%?

Was through the consulting work.

Okay. Thank you.

Okay. And he has another question. What percentage of the R&D budget is being spent on pharmaceutical software?

Momo?

Okay, hold on a second. It's about $500,000 plus per quarter, so it would be about $2 million.

The question was what percent of R&D is on pharmaceutical versus the Words+.

Oh, 90%.

It's very, very high.

Okay. And there is another question. Have there been significant changes in the sales management of the pharmaceutical software line?

Well, we did announce that Ron Creeley resigned, and that John DiBella has now taken over as the Manager of Marketing and Sales. So that's a change.

Okay. And he has another question. Are the pharmaceutical software licenses still all one year deals, or are two year or even longer deals available?

Well, they're only booked a year at a time. Sometimes, especially the larger companies like to negotiate multi-year licenses, so they don't have to keep going back and re-evaluating. Some of the larger companies, any time they have a new contract, have to go through a process of re-evaluating all of the competition, which isn't that big in the case of GastroPlus, but say in the case of ADMET Predictor, there can be 15 or 20 potential competitors.

So their preference now is to pick one and stick with it for two or three or five years, depends on the company. And then it doesn't necessarily lock you in to a certain number of dollars per year, because what we're seeing is even in the second or third year of a multi-year contract, they're adding additional licenses or additional modules that have been introduced during the interim, and so on.

Okay. And there is another question. Will pricing be changed when the next batch of new products are released?

I did mention we've already instituted some price changes. So we've increased prices on some of the software. We haven't had any price increases for about five years, as I recall, on the things that we did increase. And in addition, we're giving very generous discounts for renewal, and we're knocking that down a little bit. We don't think we need to be quite so generous but we'll still give a nice discount for renewals.

All right. And he has another question. Are there any significant changes in the competitive landscape?

Haven't seen any, same players. I'd say we've seen one or two drop out but haven't seen any new -- someone's cell phone is feeding back into the phone system it sounds like. Again, we haven't seen any new players, and we haven't seen really much change at all I'd say in the ones that we figure we're more directly competing with.

Okay. And [Gar Chan] has a question, or a comment and a question. Nice work during difficult times. Any headway in the area of auditory delivery formulations?

No, sorry, Gar, not yet. That's another area that we can look into but so far haven't had a strong push yet in that area.

And Howard Halpern is raising his hand.

Howard, you weren't first this time. Gosh.

Let me see if I can undo his line here. Howard, can you speak?

-hear me now?

There you are.

Yes.

Okay.

You're slipping, Howard, you're usually first.

I guess it's just the cold Northeast that has me a little slower.

There you go.

I guess my first question has to do with, looking through the 10-Q, the one customer who allowed you to generate the 29% increase, I think it was $220,000, was that, any of it due to a price increase or was it mostly due to increased site licenses from that customer?

There were no price increases in the first quarter. Those were instituted during the current quarter.

Okay. So I can assume, then, that the $220,000 was really due to an increase in site licenses then from that customer?

Let me ask John. John, that sounds like a big number. Was it 220 from a single customer increase over last year?

There's, not that I'm aware of. I'll have to go through the report again. There was no such increase from just one single customer.

Okay. Because it said our largest renewal this quarter was for one of the top five pharmaceutical companies for the gastro license of over 990.

I have an answer for that. Not only a license, when I discussing 10-K by per customer, that was a combination of license as well as study contract. One of the large pharmaceutical companies we -- sales increased as well as study contract.

Okay.

Was that a study contract or a funded collaboration?

Funded collaboration.

The difference is, just so that everybody is clear, a funded collaboration is where a company comes in, for example, Pfizer or GSK or Roche comes in and says, we want you to add the following capability to GastroPlus, and we'll pay you to do it and we'll share data with you to help validate it. That's a funded collaboration.

A study contract is any of those companies or others come in and says, we're working on compound 12345 and we've got some data here in animal and in human, and we want you to analyze it for us and tell us what's going on. So that's the difference, the study contracts are specific projects on specific drugs that are in development. Where funded collaborations are generic capabilities being added to the tools that we have already.

Okay.

(inaudible).

Okay. I guess in relation to that question, though, for site licenses, have you made any in-roads into other parts of the pharmaceutical company, other than what you've had, new or interesting areas that are seeking out your licenses?

Yes. In fact, that's a good -- very good question, because that relates back to the study contracts. We're now working with clinical groups. In the past, with GastroPlus, we were pretty well a pre-clinical play, so we would work with animal data, first in human data, but never get much beyond that. The clinical folks tended to use different software tools that have been out for, oh, my gosh, decades. Not as mechanistic as gastro. More simpler models.

And so now we're getting the clinical people interested in these more detailed, these sophisticated mechanistic models that allow them to understand exactly what's going on. You can write an equation that fits a set of data that's just an equation that happens to make the equation go through the data points. Or you can have a mechanistic model which explains it in terms of the fundamental physics and chemistry and biology of what's going on. So that's what I mean by a mechanistic model. And we're now getting the clinical groups much more interested in using these mechanistic models.

And does the Novartis example help publicize the cost savings I guess that companies will come seek you out for certain paths of drugs.

Not only the Novartis but all of the other ones in those three sessions at AAPS that mentioned that the work they were presenting was done with GastroPlus, they're speaking to audiences of, depending on the size of the room, from 50 or 60 up to hundreds of people in the room. So it's fantastic. It's one thing for us to say we've got good stuff, but it's quite different for a third party to say, hey, this is good stuff.

Okay. One last question. I know it really probably doesn't impact the top or bottom line one way or the other, but has there been any traction on the Abbreviate! software on iTunes yet?

We haven't made anything public on that but I would say that we're still pretty early, and we've got some other plans for how to push that forward even better.

Okay. Well, keep up the good work. Was a great quarter.

Thank you, Howard.

Okay. Walter Ramsley has sent another couple of questions. And this first is regarding the earlier sales management question. Has John implemented any significant changes yet? What might happen in the future?

Well, I'd say in his first few months, he's been doing a bang-up job. We got renewals accomplished very -- in a very timely way in the first quarter and second quarter is of course under way, and we haven't made anything public but things are looking good. He has hired another person on the clerical side to assist with things like unlocking software and databases, and looking at the market in general. So yes, I think for someone who's only had this responsibility for, what, four or five months now, I think he's doing a very good job.

Okay. And another question from Walter Ramsley is, will upcoming product releases increase the amount of capitalized software that's expensed each quarter?

They will at the point that we begin to sell. The way capitalization works is, I think most of you know is, as you're developing a new capability, once technical feasibility has been established and you're developing that new capability, you capitalize the development cost until it's offered for sale. As soon as it's offered for sale, you begin to amortize that development cost over some reasonable period. We've tended to use five years even though GastroPlus has been on the market for 12 years, and we expect it to be out for much longer than that, as other software programs have been. I mentioned some of the clinical folks use software that's been out for decades.

So we use a fairly conservative five year approach for amortizing the capitalized software development costs. So yes, that will kick in at some point.

Okay. And he has another question. Is the first quarter organic revenue growth rate of approximately 15% likely to be maintained?

Well, I'm hoping it's going to be even better than that. We're not making any projections but I believe that we can do better than that.

I think that's the last of his questions. There is one other person who has raised a hand, Sunit. Let's see if Sunit is still there and has a question. No. Perhaps not. They may have left the call.

All right. I'm going to look through the queue here, see if they are any other raised hands. I don't see any raised hands. I don't see any further questions.

Okay. Well, thank you, everyone, for attending. Again, the slides will be available, just send an e-mail to info@simulationsplus.com. And we'll send you a copy of the slides. They also will be filed with an 8-K.

Thank you all. That concludes today's conference call and webinar. If you missed any part of today's presentation, the audio playback will be available at our website, www.simulations-plus.com. Thank you for joining us today.

Thank you very much. Bye-bye.