Simulations Plus Inc (SLP) 2011 Q1 法說會逐字稿

Good morning and Happy New Year. It's Friday, January 14, 2011, and on behalf of Simulations Plus, I welcome you to our first-quarter fiscal year 2011 financial results conference call and Webinar.

Our Chairman and Chief Executive Officer, Walt Woltosz, will be presenting this morning. Joining Walt as panelists are our Chief Financial officer, Momoko Beran, and our Director of Marketing and Sales, John DiBella. An opportunity to ask questions will follow Walt's presentation.

You may indicate that you have a question by using the hand-raising icon on your control panel. If you're using your telephone to listen to the call, please be sure to enter the unique audio PIN displayed when you join the call. This enables us to unmute your line so your question can be heard, or you can use the questions pane on your control panel to type in the question and send it to us. This call is being recorded for playback at our website, www.simulations-plus.com.

It's now my pleasure to turn the presentation over to Walt Woltosz, Chairman and CEO of Simulations Plus.

Thank you, Rene, and welcome, everyone, to our first quarter fiscal 2011 conference call. I'll read the Safe Harbor statement to keep our attorneys happy and then we'll get into the discussions.

So, with the exception of historical information, the matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties. The actual results of the Company could differ significantly from those statements. Factors that could cause or contribute to such differences include, but are not limited to, continuing demand for the Company's products; competitive factors; the Company's ability to finance future growth; the Company's ability to produce and market new products in a timely fashion; the Company's ability to continue to attract and retain skilled personnel; and the Company's ability to sustain or improve current levels of productivity.

Further information on the Company's risk factors is contained in the Company's Quarterly and Annual Reports, and filed with the Securities and Exchange Commission.

So, our first three months of fiscal 2011 created another -- or resulted in another record first-quarter. This is our 13th consecutive profitable quarter. The sales were up 15.4% on a consolidated basis across both business units to $2.81 million from $2.44 million in last year's first quarter. Our net income was up 32% for the quarter over first-quarter '10. Pharmaceutical segment sales up 18.2% over the first quarter and our Words+ subsidiary sales up 8.3% over last year's first quarter.

Balance sheet, our cash remains strong -- just under $9 million, $8.87 million, at November 30, and that's after using cash of $2.2 million total for our share repurchases between our Phase 1 program the previous year and the Phase 2 program that is still in progress, now nearly complete -- will be completed next month.

Shareholders equity, up 13.4% to $12.5 million from $10.8 million at the end of last year's first quarter. And note since August 30, shareholders equity decreased 4.5% to $12.5 million, due to the cash that we've used in the first quarter for share repurchase. So, on a per share basis, equity would be up; but on a total basis, because of the cash used, it's down a little bit from -- in the first quarter. No debt, so we'll continue to be a debt-free company.

Our consolidated revenue, you can see the typical pattern that we see, where there's a pattern beginning in the first quarter, an increase in second and third quarter, and then a drop in the fourth quarter, and then that pattern repeats over the years. This year, however, the first quarter of this year, you can see is the highest quarter other than second and third quarter last year and third quarter in '08, of all the quarters shown on these graphs. So, we've now got a first quarter that's doing as well as we did, say, in the second and third quarter of fiscal year '09. And that we feel is a very positive sign.

Quarterly revenues broken out by business unit, the pharmaceutical side of the business, which we tend to call Simulations Plus, and the Words+ subsidiary shown here in green. Again, you can see in the pharmaceutical business that typical pattern. And that's kind of a self-perpetuating pattern because of the annual license basis of our software licenses. So, when the company initiates their license in a certain quarter, then they tend to renew it in the same quarter the following year, and so the pattern tends to perpetuate.

On an annual basis, of course, we've just begun 2011, so we don't see the annual plot here, but you can see the growth that we've had over the past five years, complete fiscal years, on the chart on the right. And looking at pharmaceutical only, you can see the straight-line trend here for the first-quarter revenues for pharmaceutical. And again, that just points out that the pharmaceutical business is doing quite well; you can see, again, the $2.1 million in the first quarter for pharmaceutical alone actually exceeds the second and third quarters back here in '08 and '09.

Gross margin tends to stay in this range, around 75% plus or minus a handful of percent. And that continued this current quarter with just under 74% gross margin. This is on a consolidated basis -- both the business units together.

Income before taxes -- this quarter, you can see about $820,000. And again, it tends to follow the same pattern that you see in the revenues. Of course, the leverage is much stronger when it comes to income because, as we exceed break-even on the software side of the business, the margins are quite high. And so, a certain percent increase in revenue has always -- at least so far, has always resulted in a much higher percent increase in earnings.

Net income shown here after taxes. We do have to help support the government, obviously. And so, after taxes, our $820,000 for first-quarter '11 resulted in $567,000 of net income. The net income for the pharmaceutical side being in the blue, Simulations Plus, and we had a slight paper loss of about $10,000 on the Words+ side, but not much of an effect there.

So our consolidated income statement -- you can see the comparisons here. I won't read all the numbers, but again, the total revenues here $2.81 million versus $2.44 million last year; income before taxes up -- that's, what, almost, oh, 40% or so -- 30-something percent; and then earnings per share $0.034 against -- this was actually about $0.0256 the previous year.

Balance sheet -- cash, again, over the last year, in spite of spending quite a bit on share repurchases, we're still increasing cash over what it was the previous fiscal year; again, down a little bit from the end of August of 2010 because of the share repurchases during the first quarter. Shareholders equity, again, over the last 12 months from $10.8 million to almost $12.5 million.

Regarding the share repurchase program, the Board did approve a second share repurchase program last year. That began in February and will end in February of this year, so it's a few weeks left. The Phase 2 program authorized repurchase of up to 1 million shares through February of 2011. And, of course, the purpose of the program is to use some of our excess cash to increase shareholder value by reducing the number of shares outstanding, and increasing the per share metrics, earnings per share, sales per share, equity per share, and so on.

As of today, in the Phase 2 program, we've repurchased approximately 816,000 shares at an average price of about $2.69 per share. The stock is trading right now at about $2.88 today. So, so far, we're ahead of the game. We expect to purchase additional shares; we don't say how many, but we are able to buy as much as 184,000 more shares over the coming weeks, if the market conditions are what we consider favorable for repurchasing.

We continue our aggressive marketing and sales program. We did over 50 conferences, scientific meetings, shows, last year. We have almost 50 already scheduled for this year. There's always a few more that pop up during the year, so it looks like we'll probably exceed the number that we did last year. This is where we generate our sales leads, where we network; where we maintain an awareness of the state-of-the-art; see what the competition is doing. And it's a great opportunity for us to get our scientists out, who are very active in supporting the marketing and sales group in staffing exhibits and in, of course, doing poster presentations and podium presentations.

I think we did 35 of those in the last year. So, this is a significant increase over what we were doing a couple of years ago. I think it's one of the key reasons that sales continue to grow, even through the global economic crisis that we've had in a lot of companies over the last couple of years. We've continued to be growing and profitable quarter-over-quarter throughout all of that.

And we believe that's because there is a fundamental industry shift where the pharma industry is beginning to catch up with other industries like aerospace and automotive and electronics, and utilizing Simulations' software and modeling to increase productivity. As all software tools that are a alive and well, ours are constantly evolving.

And so we continue to add capabilities -- major increases in last year released in the summer in ADMET Predictor; some improved-structure property models. We have another release of ADMET Predictor in final testing now that will add the ability to predict metabolic sites. In other words, when a molecule is metabolized by an enzyme, it's certain atoms that are attacked by the enzyme or catalyzed by the enzyme to cause that reaction to take place, and change that molecule from one to one to a different molecule. Well, knowing where on the molecule, which atoms are likely to be attacked by different common enzymes, is very valuable information for the chemist who's trying to design a new medicine.

So we now are adding that. And that's a result of the work that we've been doing in our SBIR contract -- SBIR grant, I should say, with the National Institutes of Health. And that is approaching the end of its two-year grant period. So we will be releasing that new capability here shortly. Also, the increased accuracy of atomic partial charges, which was a fundamental basis for being able to predict the sites of metabolism as well as improving predictions of all of the -- our other models, that continues to improve. We've already released some of that in earlier versions, but in this new version, we'll also see some increased capabilities as a result of that.

And we'll see increased toxicity models. We have become a player in toxicity prediction in a significant way over the last several years. We continue to add new toxicity models of different kinds of toxicity. There are many. It will probably be long after my lifetime before we have the capability to predict even most kinds of toxicities, because there are so many, but the more we can predict, the more we can help screen out poor candidate molecular structures in early discovery.

And this is one of the key uses of ADMET Predictor, and that is, when chemists are trying to design new molecules, they can be looking at thousands to millions to even hundreds of millions of different molecular structures, and they don't want to have to make them all and test them; there's just not enough resources in the world to do that. So the more of them that we can eliminate using software upfront, the faster the chemist can get through these huge molecular libraries and hone in on the structures that are likely to become good medicines.

In GastroPlus, our flagship product, the drug-drug interaction capability is a huge competitive capability that we really needed for a number of years. We completed that last year under a two-year funded collaboration with Hoffmann-La Roche, and we released that in the summer. We also released ocular delivery, so delivery of drugs to the eye, and nasal pulmonary delivery -- so the inhaled-type drug delivery capabilities were added to GastroPlus 7.0. All three of those -- drug-drug interaction, ocular, and nasal pulmonary -- are market-expanding types of capabilities. Some companies work, for example, only in ocular. Drug-drug interaction allows us to be more competitive and get more of a market share in that area.

In MedChem Studio, we continue to evolve the very powerful molecule design -- we call it de novo design; brand-new molecule design capabilities. And all of these new capabilities of all of these programs were released in the fourth quarter. It does take some number of months after you release something before you start seeing sales. John DiBella can comment a little bit later on whether we've seen a significant sales effect just yet.

Collaborations, consulting, and brands -- this has become the most significant part of our business. Our marketing and sales emphasis on our consulting capabilities is paying off. I think we virtually always have at least about four consulting contracts underway. These contracts range from a matter of weeks to a few months, typically. And so, consulting -- and our consulting customers have often been the top five pharmaceutical companies who actually have experienced GastroPlus users. Virtually all of our consulting is done with GastroPlus.

But we just have more experience. We do more studies; we use it every day, where the average industry scientist has many other duties and GastroPlus is not their primary focus. So we have an expertise that even the biggest companies in the world come to us for, when they get into complicated analyses on some of their drug development projects.

We had a number of long-term collaborations. I mentioned the funded collaboration with Roche to develop the drug-drug interaction. We also had a funded collaboration with Pfizer for the ocular capability, and another funded collaboration for the nasal pulmonary capability from GlaxoSmithKline last year. We completed those, so those longer-term collaborations being completed resulted in a little lower revenue from this segment of collaborations, consulting and grants. However, the number of consulting contracts continues to offset that but didn't offset it completely, as you can see; but it is a growing business area for us.

As far as our technological advantage, as with all software companies, as soon as a new release is out, we're working on the next release. We always have a path -- we're expanding capabilities; enhancing customer convenience and user convenience; providing intelligence in the software to catch typical errors. For example, if a person makes certain types of inputs, we put up a message and say, something doesn't look right here, in a sense, and you need to doublecheck to make sure that this is what you really want to do.

With GastroPlus, again, our flagship product version 7.0 was released in August. This was a major upgrade with the three expanded market-expanding capabilities that I mentioned earlier. Version 5.0 of ADMET Predictor was also released in August. This, again, was a major upgrade from the earlier version. And the SBIR grant, again, is funding the major effort towards the improvements that we had with these quantum level molecular descriptors and the prediction of sites of metabolism that we have. We expect to release that during the second quarter, which we are now in -- second quarter ends in the end of February. So, we're hoping that that's going to be released before the end of February.

MedChem Studio version 1.0 -- this was a name change from ClassPharmer. ClassPharmer was a product we acquired a little over five years ago in one of our acquisitions. We used that name for a number of years but we evolved the program to more of a medicinal chemist design capability as well as the data mining that it had already had. And so we changed the name to MedChem Studio.

At the same time we did that change, there was a major upgrade in the software -- some significant speed improvements, graphics that were enhanced significantly and are actually being enhanced even further right now. And we've got some new developments there in beta test in-house. We're not ready to announce them just yet, but we expect to release a nice announcement along that line here, again, by the end of February.

DDDPlus is a stable product. We continue to fine-tune capabilities. We've seen a growing customer base. This is a unique product. There is no other competition for this product. It is a simulation of how drugs dissolve in laboratory experiments, in what are called in vitro experiments. And this is a tool, then, that can help formulation scientists as they're trying to design -- make sure why I'm getting a message here, if you can see that checking for new software -- this helps formulation scientists as they're designing new dosage forms.

So, a tablet, a capsule, a controlled release formulation, using this simulation rather than the old-fashioned method of counting out tablets, and then running in the lab and finding it's not exactly what you want; going back, changing the formulation, pounding out some more tablets, and doing that iteratively. With DDDPlus, they can run one or two experiments, calibrate the model, and then through the software, test different design changes to see which ones are likely to produce the result that they're looking for. This tool has been adopted more and more by industry, and the FDA Office of Generic Drugs added, I think, I believe it was 10 more licenses last year.

For those of you that don't know, I went to Auburn University and we won the National Championship Monday night. I was at the game in Phoenix. This is our coach, Gene Chizik, accepting the trophy for the NCAA -- or the BCS National Championship Football team. It was a heck of a game. It was Auburn versus Oregon. It was supposed to be an offense of shootout; it turned out to be much more of a defensive battle, but a very exciting game.

And now I'll take questions, and let's see, I've got -- wish I could expand this window somehow. All I see is a little slip of these questions, but let me scroll up here. Okay. Looks like Howard is the first one and the question here -- is it more likely than not that the Board will renew the share repurchase program once Phase 2 is completed?

Well, we've had no discussion of that at all, and so I really couldn't comment on that. I think there's a possibility, but until the Board meets, I won't speak for the Board. I'm going to turn on your microphone, Howard, if you want to add to that and follow it up, go ahead.

No? I guess not. Okay. So, I'll mute that again.

Next question -- what has been -- this is also from Howard -- what has been the response so far to the latest version of GastroPlus in terms of new licenses from existing customers or potential new customers?

John, I'll let you answer that one.

The response so far has been very good. As Walt mentioned, the release of GastroPlus 7.0 came out the end of August, beginning middle of September, once we had addressed some issues. And so we were in the first fiscal quarter already by that point. We were able to demonstrate and present the software in Web meetings and also at the largest conference for us each year, the AAPS meeting, which was in New Orleans. And we received quite a bit of positive feedback.

This quarter, which we're in now, the second quarter, we have seen several existing customers now add seats and modules -- the new modules that were developed, drug-drug interaction and the Additional Dosage Routes module. And I think, more importantly, we are in the process right now of preparing two proposals to do some modeling and simulation work for companies developing inhalation devices. And this would certainly not have been a market that we would have been able to help with their research activities, had we not had this. So, we are seeing some increase in the level of interest in our consulting services for these Additional Dosage Route modules that we have now.

Thank you, John.

Okay. So the next question, also from Howard, do you anticipate any funded collaboration to start in FY '11?

Well, there's nothing public on that. What I can say is that we are in discussions and there are some possibilities. We don't know if they're actually going to materialize, but there are discussions going on along that line.

Howard's next question -- can you expand on what you mentioned in your press release regarding outsourcing some activities, in order to enhance and expand your product line? What activities and is it reducing cost?

This is not outsourcing programming to India or anything like that, if you might have been thinking that. We are very protective of our source code and I'm maybe a little paranoid when it comes to that, but I have no interest in that sort of outsourcing.

What we're talking about here is some things like what we've done in the past, when we did our bio relevant solubility database. We outsourced the laboratory experiments to measure solubilities of, in that case, 160 different drugs and drug-like molecules in different types of solutions that represent fluids in the human body -- gastric fluids and intestinal fluids, both in fasted state and in fed state. So that would be an outsourcing type thing.

One of our plans is to use our new molecule design capabilities in MedChem Studio and ADMET Predictor. The combination of those two is very powerful for designing new molecules. Well, we can design them, but we can't make them and we can't test them in laboratory experiments -- we don't have a lab. So, we would outsource.

We'll design some molecules. We're going to do this as a proof of concept demonstration. We're going to pick some true medicinal targets, some proteins that need new medicines. We are looking at different disease areas now to pick one or two of those, and we're going to make an investment. We're going to design some molecules based on data that we are able to acquire, that is public data, so that we can build our models, and then use those models to design new molecules; have those molecules synthesized by a company that can synthesize new molecules; and then have them tested by a company that can run a very limited number of laboratory tests.

The investment here I envision is going to be on the order of, oh, probably $50,000 to $100,000 or somewhere in that neighborhood for each target that we want to go after. So we're going to make just a handful of molecules and then see how well our predictions work. If were we able to predict that the molecules that we designed would truly hit the target, and not only hit the target, but also have good properties in all of the other ways that a drug must have, that we're able to predict with ADMET Predictor.

So, that would be solubility; permeability, the ability to penetrate into cells; avoiding certain types of toxicities, and that sort of thing. So that's what I meant by outsourcing.

Next question is from [Joe Pesch] -- I hope I'm pronouncing that correctly for you, Joe. Says, what is the reason for the steady decline in R&D expenses over the past two years? It peaked at [$360,000] in Q2 of '09 and it's down to $208,000 this quarter. Thanks.

Well, there's a couple of reasons. One is that a lot of the R&D has been funded by our collaboration efforts. I guess that wouldn't change the actual expense level. But one of the big reasons is that our consulting efforts have become a significant part of the business, and so a lot of our staff hours now are dedicated to these consulting contracts, where we're actually working with drug companies on real drug development projects. And so that's drawn down some of the time -- and we expense that, of course; that's not considered R&D.

So, anything that we do like that, that's expense; anything where the staff is out doing -- I mentioned earlier, we're doing a lot more shows, conferences, poster presentations, and all of that -- those are expensed items. Those are not R&D. So, what you'll see is that the shift into increased marketing and sales activities, as well as increased consulting contracts, allows us to support actually a larger scientific staff on the pharmaceutical side. While the R&D expenses appear to be down, it's actually because the people are working on projects that are not considered R&D.

The next question is from Gordon Miller. It says, are you employing a search company to help you find acquisitions?

Well, we've actually employed a couple of them over the years, and unfortunately, in spite of that, we have not had success in finding a suitable acquisition. We've certainly had quite a number of meetings with management teams sitting across the table from each other, doing due diligence, over the last couple of years.

And just for various reasons, depending on the particular company, you get into due diligence and you start digging into the financials, the actual technologies, the skills of the people that you would get -- which is a very important part of an acquisition -- and you find that either it's just not a good match, or it is a good match, but the people that currently own the company you want to acquire just want such a high price for it, or the terms and conditions are such that they would not be favorable to our shareholders.

So, there are companies that we've seen in the past in the pharmaceutical space that basically jump into acquisitions because they feel like they just have to do one. And we're not that way. We can be patient. We're sitting on a nice amount of cash. We have used it to repurchase our shares, which I think has been beneficial to our shareholders. So we're not in a hurry to go out there and use up a bunch of cash on an acquisition and then find out we made a mistake.

We've done three acquisitions in our history. All of them have been accretive, adding to both revenues and earnings right out of the starting block. So we're cautious, and when we do one, we want to make sure it's a good one.

Next question from [Melvin LaMarr] -- it says, within -- with the past five years' success of the Company, why has the stock price not increased proportionately?

Well, you know, I ask myself that just about every day, Melvin. I wish I understood the thought processes that go on in the people who are out there buying and selling shares in our Company. We're trading at a PE in the low 20's -- 21 or 22, something like that. We have traded several multiples above that, up in the 60's and 70's, which is probably a bit high. I just -- I don't know the answer to that; I wish I did.

Next question from Gordon Miller. When do you expect Words+ to become profitable? And can you give a general opinion as to its potential contribution to your bottom line?

Well, if you check our fourth quarter of last fiscal year, June/July/August, you would see that Words+ generated a profit of somewhere over $130,000 in a single quarter. So it has been profitable, very nicely profitable in that particular quarter. This past quarter, a $10,000 loss is pretty small. It's, again, paper loss. But it has turned a corner, I believe, with the addition of the EyePro product line, the Eyegaze system. We now have that ability to offer that product area, which not only sells Eyegaze systems, but it gets our salespeople in the door, so that if the Eyegaze system is not really what's needed, then one of the other systems can be demonstrated and sold.

I believe that the combination of the EyePro system and, again, the -- I think we've focused a little bit more on cost control on that side, and the software that we've been using to collect the aged accounts receivable, which has been the source of a paper loss for several years, has improved our accounts receivable collection from these typically state Medicare -- Medicaid, sorry -- private insurance companies and so on, so that we're not seeing the problem that we had in collecting ARs some time ago.

Another question from Gordon -- how many employees now?

Momo, I think it's, what -- 40 or 41?

40.

40.

Yes.

We are interviewing people virtually every month. We still want to expand our pharmaceutical staff with additional employees, as we can find the right ones. We've been pretty selective in that area and the result is we have -- I always like to call them our elite team. This really is a team of top-notch scientists. They are hard-working people; they're brilliant; they're fun to work with; they get along well with each other.

Our management leaders, Mike Bolger, our Chief Scientist; Bob Clark, our Director of Life Sciences; John DiBella, our Director of Marketing and Sales -- I think all of these people are just -- they're right at the top of the game. And so, we've got a very strong team, a very strong management team. And as a result, we're very selective -- unlike larger companies, where you sort of have to accept some level of mediocrity, if you read some of their business literature. We don't have to do that at our size. We can be selective and find those people that are a good fit.

And so we continue to do that. We've added employees virtually every year at a relatively slow pace. But one of the issues that we deal with is that no one teaches the skills that we need, in terms of actually developing software or for even doing the consulting studies. They teach the fundamentals, but they don't teach the specific skills. And those have to be taught on the job. And that means that's going to draw down the time of other people in the Company.

So, you can't just go out and hire 10 new people and then have 10 other people dedicated full-time to training them, or you wouldn't get your work done. So, we will continue to grow. We continue to look for good people, and those that have any kind of related experience certainly are helpful.

How many Words+ employees?

I believe Words+ is 18, is that right?

18. Yes.

I'm sorry?

18.

18. Okay, I did guess right.

Okay. And that's the last question I see on the question panel. If anyone else has a question, there's a way to raise your hand, I guess. I don't see any -- scrolling through the list, I don't see any.

Okay. Well, I guess that's answered everyone's questions. So, again, thank you very much for attending today and I hope that if you have any other questions, feel free to contact the Company. We'll be happy to answer questions when we can, and we'll look forward to next quarter. Thank you very much.

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