research report – update · biosimulation technology market is projected to grow 18.3% annually,...

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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: Speculative Buy Howard Halpern SLP $5.61 — (NasdaqCM) July 23, 2014 2012 A 2013 A 2014 E 2014 E Net sales (in millions) $9.4 $10.1 $11.3 $13.0 Earnings per share

2011 A $8.7

$0.17 $0.17 $0.18 $0.19 $0.25 52-Week range $7.09 – $4.44 Fiscal year ends: August Shares outstanding a/o 07/08/14 16.3 million Revenue/shares (ttm) $0.67 Approximate float 9.8 million Price/Sales (ttm) 8.4X Market Capitalization $91 million Price/Sales (2015) E 7.1X Tangible Book value/shr $0.61 Price/Earnings (ttm) 29.5X Price/Book 9.2X Price/Earnings (2015) E 22.4X Annual Dividend $0.20 Dividend Yield 3.6% Simulations Plus, Inc., based in Lancaster, California, is a developer of drug discovery and development software, which is licensed to and used in drug research by major pharmaceutical and biotechnology companies worldwide. Key Investment Considerations:

Maintaining Speculative Buy rating and 12-month price target of $7.00 per share. Increasing use of software tools and analytics for drug discovery and development is driving SLP’s growth. The biosimulation (model-based prediction) technology market is projected to grow 18.3% annually up from an estimated $605 million in 2013, reaching $1.2 billion in 2018. SLP has penetrated only 15% of the 1,000+ potential pharmaceutical and biotechnology customers, leaving ample revenue upside. In FY15 we project 92 new customers, up from 71 in FY14, due to the release of MembranePlus™ for clinical research departments within pharmaceutical and biotechnology companies. In May 2014, the company acquired intellectual property from TSRL, Inc. for $6 million. SLP will no longer pay royalties to TSRL on GastroPlus sales, enhancing gross profit in the 2H15. 3Q14 profit (reported 7/3/14) was $1.3 million or $0.08 per share, up from $993,230 or $0.06, on sales of $3.7 million from $3.1 million in the year-ago period. Results were in line with our projections of $0.08 per share on sales of $3.5 million. We are maintaining our FY14 EPS projection of $0.19 per share, but increasing our sales forecast by $300,000 to $11.3 million. Higher sales reflect 3Q14 results. For FY15 we are maintaining our EPS projection of $0.25 per share on a $200,000 increase in our sales forecast of $13 million. Sales growth should accelerate due to a full year of higher selling prices, introduction of software modules for toxicology, and the release of MembranePlus™ in August 2014.

Simulations Plus, Inc.

Taglich Brothers, Inc. 2

Investment Recommendation Maintaining Speculative Buy rating. Our rating is based on new contracts with two top-five pharmaceutical companies, expanded simulation software sales to consumer product companies (that manufacture products such as detergent, makeup, toothpaste, etc.) that need toxicology capability, the launch of MembranePlus software in August 2014, modest price increases beginning in the 2H14, and a March 2014 distributor agreement signed with the Research Institute for Liver Diseases in Shanghai, China. We forecast income growth accelerating from 5.7% in FY14 to 32.8% in FY15 (see chart above) due to the addition of 92 new customers or new departments within existing customers, up from 71 in FY14. Customer growth should be driven by the August 2014 release of MembranePlus as this offering will broaden SLP’s reach into clinical research departments of pharmaceutical and biotechnology companies. Sales growth should be driven by a price increases on certain software offerings and customer growth. Profit growth should be driven by cost reductions primarily due to elimination of variable GastroPlus royalty payments partly offset by $600,000 per year of intellectual property amortization through 2024. These factors should underlie operating income margin increasing to 46.5% from 40.4% in FY14 and FY13, respectively. We are maintaining our 12-month price target of $7.00 per share. Our price target and dividend yield imply a total year-ahead return of 25%. The application software and business services industries’ trailing 12-month EPS multiple was unchanged at 41.4X from three months earlier while SLP’s current forward (FY15) P/E multiple decreased to 22.4X from 24.3X. We applied a 30.5X multiple to our FY15 EPS estimate of $0.25, discounted by 8.5% to obtain a year-ahead value of $7.00 per share. Simulations Plus shares are suited for risk-tolerant investors seeking exposure to a micro cap software company targeting research scientists in the pharmaceutical, biotechnology, and drug development sectors.

Overview Simulations Plus, Inc. based in Lancaster, California, employs 15 Ph.D.s and one Ph.D. candidate, unchanged from last year. Net sales consist of annual site license revenue from pharmaceutical software ADMET Predictor™, MedChem Studio™, DDDPlus™, and GastroPlus™ (see table on next page for detailed description) and consulting services from the company’s life sciences team. MedChem Designer was launched in FY11 to enable medicinal chemists to sketch molecules and integrate results with MedChem Studio and ADMET Predictor. By August 31, 2014, MembranePlus a software program designed for the simulation of in vitro permeability experiments (permeation of drugs through layers of cells) should be released. The company’s software 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 sales growth is driven by SLP’s life science staff, which increased to 17 at August 31, 2013 from six in FY06. In March 2014, SLP signed a new five-year collaboration with the FDA’s Office of Testing and Research to determine the value of mechanistic absorption modeling in developing predictive and robust in-vitro/in-vivo correlations. SLP will provide GastroPlus licenses and training to FDA scientists. In May 2014, the company acquired intellectual property from TSRL for $6 million. SLP paid $2.5 million in cash and issued $1 million in common stock or 164,745 shares using the April 25, 2014 price of $6.07 per share. The remaining $2.5 million obligation will be paid annually through April 25, 2017. The acquisition eliminates royalty payments to TSRL on sales of GastroPlus.



Software Offerings

Description Updated Developments

ADMET* Predictor™/ ADMET Modeler™

The predictor component (molecular property prediction program) enables pharmaceutical researchers to rapidly estimate a number of ADMET properties of new chemical entities. The modeler component allows researchers to build artificial neural network ensembles or support vector machine ensemble models from their own data to rapidly calculate quantum level descriptors. Prediction of sites of metabolism, new atomic level descriptors, adds skin permeability models that includes air/water partition coefficient and an improved mutagenicity models in toxicity module, and integrates with its MedChem Designer program. Version 7 has been enhanced by collaboration with Bayer Healthcare via new transporter and toxicity models. Version 7.1 launched in July 2014 provides new skin permeability model and improves the Toxicity Module.

*absorption, distribution, metabolism, elimination, and toxicity

MedChem Studio™

MedChem is designed to mine data in designing new drug-like molecules. Second version released in May 2012 generates predicted metabolites, provides the ability to sprout atoms for display, and frameworks to generate cluster of similar molecules. Being used by customers in the US including multiple licenses at the FDA, Europe, Japan, and India. The update in May 2014 added a 64-bit computer version for screening of very large molecular libraries and molecule depiction.

MedChem Designer™

Designer enables medicinal chemists to sketch molecules and is tightly integrated with both Studio and ADMET Predictor. A free product to increase demand for Predictor and Studio.

DDDPlus™

DDDPlus (dose disintegration & dissolution) enables formulation scientists to predict how changes in formulation or experimental setup affect dissolution rate in laboratory experiments. Customers in the US use DDDPlus with multiple licenses used at FDA, and in Europe, and Japan. Version 4 added an expanded parameter sensitivity analysis, a virtual trial capability, immediate release capsule dosage form, and new input/output functions.

Developments are limited, but planning to add an ADMET Predictor optional module

GastroPlus™

GastroPlus simulates absorption, pharmacokinetics (the process by which a drug is absorbed, distributed, metabolized, and eliminated by the body), and pharmacodynamics (the combination of therapeutic and adverse effects on the body) for orally dosed and injected drugs. In the drug development phase it aids researchers in dosage formulation by allowing the adjustment of formulation variables (solubility, particle density, dose, and radius) versus time, in order to achieve a target plasma concentration. GastroPlus is also capable of providing drug-to-drug interactions for ocular, nasal, and pulmonary drug delivery, as well as drug interactions with transporter and induction capabilities. Recent additions include a precipitation model, an infant PBPK physiologies model, and built-in enzyme expression levels. Customers’ are located in the US (including multiple licenses at the FDA), Europe, and Asia.

Aims to provide Drug-Drug Interaction predictions and a seamless integration with all of SLP’s other software tools.

MembranePlus™

MembranePlus, is a new product to be launched in 4Q14, will simulate laboratory experiments for measuring permeability of drug-like molecules through various membranes, including several different cell cultures (Caco-2, MDCK), as well as artificially formulated membranes (PAMPA). MembranePlus will integrate with GastroPlus. Clinical research departments should be the primary customers of this offering.

Expected to be released in August 2014. Source: company reports/presentations



Shrinking R&D Budgets – Simulation Tools to the Rescue? A strategic shift in drug development should drive the use of simulation software tools. In its annual (every January) R&D funding forecast, consulting firm Battelle projects 2014 R&D spending in the Life Sciences Industry to increase 3.1% globally and 2.2% in the US (see chart right). Battelle observes that smaller biopharmaceutical innovators should drive US growth. Battelle anticipates the trend of external partnerships within the US should continue. The global industry is still rationalizing their R&D processes in order to become more efficient, productive, and strategic in the drug development operations. The biosimulation market (use of computer aided simulation of biological processes and systems) 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. The biosimulation technology market is projected to grow 18.3% annually, reaching $1.2 billion in 2018, up from an estimated $605 million in 2013. The analysis by Battelle and the biosimulation market forecast point to 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. Software tools provided to meet endpoints by SLP 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. Simulation software should be in the forefront of reducing the 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. In silico technologies (those performed on computer or via computer simulation) are highly cost effective decision-making tools in the early stages of drug discovery. Simulation prediction and data mining models can provide the researcher with a better understanding of drug reactions in the human body, allowing for a more informed go/no-go decision. Simulations Plus software tools are being validated. In FY13, four of SLP’s customers used GastroPlus modeling results as part of their regulatory submissions. Those submissions were accepted as part of regulatory agencies’ reviews. Regulatory recognition should drive growth of SLPs tools and consulting services. Strong Growth Prospects We project sales and net income growth through FY15 based on pressure on pharmaceutical and biotechnology companies’ R&D budgets, SLP’s market penetration, and leveraging of operating expenses. We project FY14 sales growth of 11.9% to $11.3 million, reflecting 2H14 price increases for most of SLP’s software tools and the August 2014 release of SLP’s new software tool MembranePlus. We also predict FY15 sales growth of 15.6% to $13 million due to acceptance of MembranePlus, a full year of price increases, and increasing regulatory acceptance of simulation software results in regulatory submissions. 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.



Using its current offerings, the company is marketing to clinical pharmacology departments in order to provide detailed mechanistic modeling for clinical trial data analysis. The company is investigating potential aerospace industry applications for its new simulation product offering called AEROModeller™, which aims to predict aerodynamic force coefficients for arbitrary missile shapes at any mach (speed) number and angle of attack. SLP will seek funding from potential corporate customer (Boeing, Raytheon and Lockheed Missile Defense Agency) to fully develop this simulation product for rapid missile identification from tracking data, predicting the force of an item that is dropped from an airplane, process optimization for high-performance materials, and combustion instability for liquid propellant rocket motors. The company is also investigating the potential of an additional offering called MRIModeler™, which uses SLP’s artificial neural network technology to analyze magnetic resonance imaging data to classify patients into various disease categories. SLP’s initial target is autism. The company’s prototype MRIModeler program has provided subject classifications for autism at rates as high as 85% sensitivity and 91% specificity. Currently, published artificial neural network results have only had an accuracy rate of 65%. In the fall, SLP will present its results at an MIT conference called Resting State/Brain Connectivity. The company aims to find a partner with large data sets to complete the MRIModeler program for commercial use. Industry Dynamics Scientific R&D spending through 2019 is forecast to grow 2.1% annually (see IBISWorld chart right). In December 2013, IBISWorld projected the number of scientists employed in the pharmaceutical and biotechnology industry will increase by 0.6% growth annually through 2018, compared to 1.2% growth in the prior six years. The money that would have otherwise been spent on personnel should be allocated to simulation software tools that enable more efficient development of future drug candidates. 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. Simulations Plus’s presentation schedule increased from 35 in FY10 to 50 in FY13, and should exceed 55 in FY14. SLP’s first senior sales and marketing manager sharpened the company’s focus on follow up sales efforts for ADMET Predictor, MedChem Studio, and MedChem Designer. This manager was directly responsible for approximately 30% of the 61 new customers in the FY13. The company’s database of over 2,000 potential customers is growing 20% annually due to attendance at conferences. We project annual customer additions should reach 92 in FY15 (see chart above). Customers frequently evaluate software and then obtain approvals from multiple decision makers prior to the purchase, a process that can take up to six months. Company data suggests that once a customer purchases a license, the renewal rate in the following year is approximately 90%. In 3Q14, the renewal rate was 91%. Entering 4Q14, SLP is working on five consulting projects with an additional six projects in the proposal stage.

Source: IBISWorld April 2014



Economy 1Q14 US GDP annual growth fell by 1% (second estimate) from 4Q13 annual growth of 2.6% (final). The decrease reflects declines from private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment, partly offset by gains from personal consumption expenditures. Most economic analysts believe the negative GDP growth was due to the severe weather across the US during the first three months of 2014. On June 16, 2014 the IMF reduced its April 2014 US GDP forecast to 2% from 2.8% due to the current 1Q14 second estimate GDP report. The IMF maintained its 2015 GDP forecast of 3%. In April 2014 the IMF lowered its 2014 GDP forecast for Japan to 1.4% from 1.7% in January 2014, but left unchanged its 2015 forecast at 1%at 2% and 1.2%, respectively. Operations We project FY14 sales of $11.3 million, up 9.5% from $10.1 million in FY13, higher by $300,000 from our prior forecast due to 3Q14 results. Growth should be supported by an 90%+ customer retention rate, increased usage of the company’s consulting services by existing customers, new customers (see second chart on prior page) attracted by marketing efforts at conferences and meetings worldwide, the August 2014 launch of its new MembranePlus software tool, and price increases in the 2H14. For FY15, we project 15.6% sales growth to $13 million reflecting a full year of software price increases, the addition of MembranePlus software tool, the addition of 92 customers, and advanced/entry level training workshops for GastroPlus, ADMET Predictor/ADMET Modeler, and MembranePlus software offerings. The table below outlines the cost structure we anticipate for fiscal years 2014 and 2015 vs. 2013 results.

Cost Structure Margin Analysis 2013A 2014E 2015E

Actual Prior Current Prior Current Gross Profit 83.7% 84.1% 86.5% 84.5% 87.0% SG&A expenses 35.2% 37.4% 38.3% 33.7% 35.3% R&D expenses 8.0% 5.2% 8.4% 4.7% 6.1% Operating income 30.4% 39.0% 39.8% 46.2% 45.5% Tax rate 32.2% 39.6% 33.0% 32.0% 32.2% Pre-tax income 42.3% 42.3% 40.4% 46.5% 45.8%

Source: Taglich Brothers estimates and company reports We increased our gross margin projections to reflect the May 2014 acquisition of intellectual property from TSRL. The acquisition eliminates royalty payments to TSRL on sales of GastroPlus. Recognition of $600,000 in annual amortization due to the purchase of intellectual property from TSRL for $6 million will partly offset gross margin gains. In 3Q14 only recorded $25,000 or two weeks of amortization was recorded due to the timing of the purchase and no royalties were paid to TSRL. For the next two fiscal years, we project SG&A and R&D margins in the range of 38.3% to 35.3% and 8.4% to 6.1%, respectively. Our forecast is based on marketing initiatives to add and support new customers, expanding the functionality of SLP’s software programs, increasing the number of workshops in Germany, Korea, and New Jersey and training session at customer sites, and participation scientific meetings, conferences, and poster presentations in the US, Europe, and Asia. The company participated in its first aerospace conference to gauge the potential interest for its development stage offering AEROModeller. We forecast SG&A and R&D expenses in FY14 of $4.3 million and $951,000, respectively. In FY15 SG&A should increase to $4.6 million, but with the completion of the NCE program R&D should decrease to $800,000. In FY13 SG&A and R&D expenses were $3.5 million and $802,000, respectively. The hiring of additional



scientists, higher health benefits, and workers compensation insurance costs will be the primary driver for higher SG&A. We project a FY15 operating expense margin decrease to 41.4% from our forecast of 46.7% in FY14 due to increasing productivity of scientists hired in FY13. We forecast FY15 operating income growth of 32.2% to $5.9 million, up from growth of 10.1% to $4.9 million in FY14. Operating income in FY13 was $4.1 million. The leveraging of expenses should drive operating margin to 45.5% in FY15, up from 39.8% in FY14. We are maintaining our FY14 and FY15 net income projections of $3.1 million or $0.19 per share and $4.1 million or $0.25 per share, respectively. Finances For FY14, we project cash earnings of $4.6 million and a decrease in working capital of $1.4 million primarily due to increases in deferrals, partly offset by increases in receivables. Cash from operations of $6 million and proceeds from the exercise of stock options will fall short of software development costs, purchase of intellectual property, and common stock dividends. Cash should decrease by $862,000 to $9.3 million at the end of FY14. For FY15, we project cash earnings of $5.7 million and an increase in working capital of $110,000 due to decreases in deferrals, partly offset by a decrease in receivables and increase in payables and accruals. Cash from operations of $5.6 million and proceeds from the exercise of stock options should cover software development costs and common stock dividends, increasing cash by $724,000 to $10 million at the end of FY15. Based on our cash flow projections through FY15, the company should have the cash to maintain its cash dividend and expand operations (organically and through small asset purchases and acquisitions) for at least the next two fiscal years. 3Q14 and Nine-month Results In 3Q14 sales increased 20.9% to $3.7 million due to a one large renewal order and one study contract ($300,000) slipping into 3Q14 to reflect timing requests by customers. Excluding the revenue shift, sales growth was 11.1% due to 91% customer renewal rate and 20 new customers. Gross profit increased 32.9% to $3.5 million due to an increase in the gross margin to 93.9% from 85.4%. Gross margin improvement reflects the absence of GastroPlus royalty payments to TSRL. On May 15, 2014 SLP began incurring annual fixed amortization expense of $150,000 per quarter, of which only $25,000 was recorded for the three-month period ending May 31, 2014. Partly offset by $9,000 in royalty payments to Accelrys on a portion of the ADMET Predictor Metabolism Module and higher amortization and workshop costs. Operating expense margin expanded to 38.5% from 35.9% due to a $329,000 increase in operating expenses. The 29.6% increase to $1.4 million in operating expenses was due to a 33.3% increase in SG&A expense. Most of the increase reflects a $75,000 increase in commissions to dealers in Japan and China, a $21,000 increase in trade show expense, a $68,000 increase salaries and consulting fees, and a $118,000 increase in professional fees stemming from contract negotiations to complete the agreement with TSRL. R&D expense increased by 14.1% to $235,000 reflecting increases in both staff and salaries for the Life sciences team. Operating income increased by 35.3% to $2.1 million due to expansion of gross margin to 193.9% from 85.4% in 3Q13, partly offset by higher operating expenses. Other income increased to $15,355 from $12,915 in 3Q13, due to currency exchange gains ($7,300 vs. a loss of $980), partly offset by lower interest income ($8,000 vs. $9,200), and rental income (zero vs. $4,700). In 3Q14, net income increased by 31.6% to $1.3 million or $0.08 per share compared to $993,230 or $0.06 per share. We projected income of $1.2 million or $0.08 per share on sales of $3.5 million.



In the first nine-months of 2014 (see table on next page), sales increased 11.3% to $9.5 million due to 57 new customers, reflecting new companies and departments within existing large customers, as well as higher revenue from collaborations, analytical studies, and workshop/training activities. Gross profit increased by 15.8% to $8.3 million due to a gross margin gain to 87.7% from 84.3%. The increase in gross margin reflects the 3Q14 elimination of GastroPlus royalty payments, partly offset by higher amortization and workshop costs. Operating expense margin increased to 43.6% from 39.1% due to expense growth exceeding sales growth, partly offset by improvement in gross margin. Operating expenses increased by 24.2% to $4.1 million due to increases in SG&A of 25.6% and R&D expenses of 18.4%, respectively. The increase in SG&A expense stemmed from a $139,000 increase in commissions to dealers in Japan and China, a $72,000 increase in trade show expense, a $232,000 increase salaries, bonuses, and consulting fees, and a $176,000 increase in professional fees stemming from contract negotiations to complete the agreement with TSRL. Higher R&D expenses reflect increases in both staff and salaries for the Life sciences team. Operating income increased by 8.4% to $4.2 million due to increased sales and gross profit gains reflecting improved gross margin, partly offset by higher operating expenses. The latter caused a decrease in operating margin to 44% from 45.2% in the year-ago period. In the first nine-months of 2014, net income increased by 6.1% to $2.8 million due to strong 1Q14 and 3Q14 results, partly offset by flat 2Q14 results. Finances In the first nine months of FY14, cash earnings of $3.6 million and an increase in working capital of $222,000 resulted in cash from operations of $3.3 million. Working capital increased due to an increase in receivables, partly offset by an increase in payables and deferrals. Cash from operations was unable to cover the purchase of intellectual property and payment of common stock dividends. Cash decreased by $2.4 million to $7.8 million. In 3Q14, cash earnings of $1.6 million and a decrease in working capital of $104,000 resulted in cash from operations of $1.7 million. Working capital decreased due to an increase in payables, partly offset by an increase in receivables. Cash from operations did not cover payment of common stock dividends and purchase of intellectual property. Cash decreased by $1.9 million to $7.8 million. Strategy Attendance by SLP life science team members at conferences and scientific meetings worldwide in order to increase visibility and customer leads. SLP increased its attendance at conferences in FY13 to 50, up from 45 in FY12. In the first nine months of 2014, the company attended 30 meeting and presented 20 posters and oral podium presentations. We anticipate the company will attend at least 55 conferences worldwide. Expanding the contract research, consulting, and workshop services offered to the industry. At the start of 4Q14, SLP was working on five consulting contracts and had two proposals outstanding. This pace should continue due to formation of a second studies team utilizing the Predictor/Modeler tool. 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. In 3Q14, Simulations Plus conducted six on-site training workshops at client sites, which included presentation in Japan and India. SLP hosted three webinars on its software tool update for over 550 people. Simulations Plus signed a five-year collaboration agreement with the Food and Drug Administration’s Center for Food Safety and Applied Nutrition. SLP is three years into the agreement that enables them to build toxicity models and avoid the cost (estimated at $1 million by management) of creating it own database. This collaboration should enable the company to generate revenue from fully developed toxicity models sold to additional consumer staple companies such as Unilever NV. In June 2013, the company signed a material transfer agreement with the National Toxicology Program at the National Institute for Environmental Health Sciences, NIEHS. The collaborations aim is to identify how SLP’s software tools can be used as a platform to drive toxicity testing. SLP completed two chemical entity (NCE) projects. SLP has successfully developed early stage molecules that target the treatment of Malaria and pain with COX-2 target. The company used its predictive modeling software (MedChem Studio, MedChem Designer and ADMET Predictor) to design new molecule(s) for specific protein targets. The completion of the two NCE projects has enable SLP to present the results to potential customers that demonstrates the capabilities of its ADMET design suite in generating high quality low cost lead molecule candidates faster. Competitive Landscape Pharmaceutical companies conduct drug discovery and development efforts through internal development staffs and by 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. IBISWorld’s profile of the industry indicates that an estimated $290 billion of sales are at risk due to patent expirations during the five years to 2019 (data IBISWorld obtained from EvaluatePharma). Drug makers have turned to innovative drug treatments that serve an unmet need in order to get regulatory approval. In 2013, the FDA approved 27 drugs that work differently or better than existing drugs or serve ailments lacking good treatments, down from 39 in 2012. 20 were approved in 2011. 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 are unable to find other companies that might pose a competitive threat to GastroPlus or DDDPlus. Those simulated software offerings appear to be unique. ClassPharmer and ADMET Predictor/ADMET Modeler operate 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 an estimated 38% of the outstanding voting stock (based on SEC filing on December 26, 2013). 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 the 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 18.7% of sales are to Asian customers. 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. Legal In June 2014, SLP was served with a civil action entitled Sherri Winslow v. Incredible Adventures, Inc., et al. in Los Angeles, alleging wrongful death and seeking unspecified damages arising out of a May 2012 plane crash in Nevada. The plaintiff alleges that the company was the owner of the subject aircraft. SLP denies all material allegations against it and intends to vigorously defend itself. 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 2012 was 20,445 a day. In 2013, average daily volume fell to 18,529 and continued to decrease slightly over the last three months (ending July 22, 2014) to 18,175. SLP has 16.3 million shares outstanding and a float of approximately 9.8 million, so investor should by aware that a thinly traded equity could experience price volatility.

Simulations Plus, Inc. Consolidated Balance Sheets

FY2011 –FY2015E (in thousands)


* Our FY15 estimate includes the issuance of $1 million in common stock or 164,745 shares on April 25, 2014 at $6.07 per share Source: Company reports and Taglich Brothers estimates

Simulations Plus, Inc. Annual Income Statement Model

FY2011 – 2015E (in thousands)


Source: Company reports and Taglich Brothers estimates

Simulations Plus, Inc. Quarterly Income Statement Model

FY2013 to 2015E (in thousands)



Simulations Plus, Inc. Cash Flow Statement FY2011 – FY2015E

(in thousands)





Price Chart

Taglich Brothers Current Ratings Distribution

Investment Banking Services for Companies Covered in the Past 12 Months Rating # % Buy 2 7 Hold 1 17 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 continues to pay 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.

research report – update · biosimulation technology market is projected to grow 18.3% annually,...

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