Hi, I'm Steve Dechert, an Equity Research Associate with KeyBanc Capital Markets. Joining me today is the CEO of Simulations Plus, Shawn O'Connor. Shawn, if you could give a background on yourself and then just a general overview of the company, we'll then go into our Q&A. Yeah, that'd be fine. Thank you, Steve, and KeyBanc for having us on board for the conference here this couple of days. Simulations Plus is a company that is now in its 27th year, focused on the supply of modeling and simulation tools and services to the pharma drug development industry. Modeling and simulation takes many forms and shapes, and is applied early in discovery and all the way through to regulatory approval, through clinical studies, and to FDA regulatory approval and beyond, after-market applications as well. We are a company that it sources 60% of our revenues in software tools and 40% in consulting services. I've been on board with Simulations Plus for a little bit more than five years. Now have been in this industry for more than 25 years, this being my third company in the space. Long adoption curve, very underpenetrated market today. Challenged, we'll talk, I'm sure, about market conditions over the last couple of years, but a lot of wind in the sail coming back, and a lot of interest in terms of applying computational predictive analysis techniques to make the long 10, 12 year cycle time and very costly, over $1 billion per approved drug, process more efficient and deliver the goods to patient populations and improving health. Got it. That's great. Can we dive in a little bit more on the different factors that are driving the adoption, modeling, and simulation into the drug discovery industry? Yeah, you know, the use of modeling and simulation, as I said, is applied to throughout the continuum. In discovery, certainly an area of great focus today, a lot of highlight coming from the world of AI in terms of that starting point in terms of drug development, the identification of a molecular structure that hits a target and has a efficacious result. A lot of focus in that area to improve what is about a 5,000-to-1 batting average right now in terms of the number of molecules that are taken into the clinic for every one drug that gets approved. So improving that batting average is obviously can be very impactful. With improvements in technology today, the throughput of data that can improve algorithms that match the molecular profiles to targets has increased tremendously. One of our key products, ADMET Predictor, is a neural network-based product that is used by our clients in that lead optimization process and discovery. Applications of modeling and simulation in the clinic are abundant in profiling drug dosing regimens in terms of profiling patient populations, and is applied all along the way from first in human, animal translation of animal studies into human. From phase I, phase II studies into protocol development for large scale phase III studies, the analysis of them after the fact, simulation of them in preparation for their protocol delivery into the marketplace. And then afterwards, in terms of post-approval, going back and adjusting, extending in new indications. Predictive analytics is used in a number of different ways in the drug development process. Adoption, you know, from the early days, was a scientific hurdle to achieve, those hurdles have been achieved, well accepted in terms of its applications. Regulatory environment, the regulatory body's use of modeling and simulation obviously a key. Their endorsement, their acceptance, in fact, their guidance to industry in terms of where and how to apply modeling and simulation to benefit drug sponsor programs and their evaluation thereof have been very important. So, you know, no question in terms of the value of modeling and simulation and the challenges in terms of speed of adoption across all drug programs, across all therapeutic areas. And on top of that, new ways to apply or always identified, you know, on an annual basis, that every time we think we start to get more penetrated, more applications drive more need and more use of modeling and simulation each year. Okay, great. And then can we go into how you're differentiated from other competitors offering biosimulation software? Yeah, I'll be glad to. You know, as I said earlier, modeling and simulation is not one tool. It's a set of tools that are used for different purposes in the process. It's a market that's always been both a licensing of those tools for our clients to use internally, and as well supplementing that, provision of consulting services for what easily to conceive are those clients that aren't large enough to hire and build internal modeling and simulation departments, and that's certainly true. But the reality is that the majority of our consulting services are provided to large pharma who have internal modeling and simulation departments. So, our services apply across the size of client. From a competitive point of view, as a public company, more often than not, people look to the peers of Certara and Schrödinger as being two companies that play in this market. Certara probably is the most comparable company, although it's not perfectly apples to apples. They are extended into areas in which are really kind of outside of biosimulation into regulatory writing and regulatory processes that are non-predictive analysis areas. So it's not an apples to apples comparison, but we do have a product and service portfolio that overlaps partially on Certara's similar portfolio. Schrödinger has a wonderful molecular modeling tool, but it's not a competitive product to ours. Our ADMET Predictor product and their molecular modeling tool sit side by side in the discovery world and used in that lead optimization process, so not really a competitive situation. So Certara, I would say, is our most frequent competitor. On the consulting side, there are many consulting practices out there from the individual scientists that hangs out his shingle after a career in large pharma. I would say that we are of the greater size in terms of consulting practice by number of scientists, and Certara's probably a little larger. We probably sit in there number two. Got it. Okay. And then can you talk about your customers and what you're seeing in the end markets you serve? I believe you serve 19 out of the top 20 large pharma companies, but also service the small biopharma companies as well. Yeah. You know, the market opportunity runs the full gamut there. Often talk about it in its two segments of large pharma and small biotech, although there are some large biotechs that will lump in with the large pharma, they operate more similar in that direction. Lumped into those two areas because certainly the market dynamics over the last couple of years, small biotech, don't need to repeat, you know, the funding history of flourish of funding in the 2020 to 2022 sort of window of time, and a fall off of funding there. Small biotech represents 10%-15% of our business, or thereabout. And so the slowdown in that market segment certainly affects us, but to that proportion. You know, the good news, I read yet another report this morning that said, gee, since the first of the year, we've had more funding, small biotech funding, in 2024, comparable to its peak, a couple of years ago. So a little bit more wind in the sail coming in that market segment, which bodes well for us. Large pharma also been a little bit of a choppy sea over the last couple of years. Maybe not funding is the driver there, but macroeconomic issues. You know, today it's more the looming, you know, patent runoffs of some large revenue streams out there that is impacting the situation. In a market that runs the gamut of Novo, who is flushed with cash and spending readily to a Pfizer that, while doing well, in anticipation of COVID revenue fall off, is looking to cut back, and everything in between those two extremes. So still a bit of a choppy environment, but I'd say, you know, improving. And I hope that at some point soon here, I can change the use of cautiously optimistic to, you know, more aggressively optimistic. The market this year is better than it was last year. But you know, there's a lag between funding picking up and when that translates into buying activity in small biotech, as an example. So we look to do better this year. We did well last year and given the market circumstances, and grew 10%, and expect to grow faster than that this year. And certainly the trend lines are more in our favor, both this year and in the long term. That's great you're starting to see improvement. Just wanna touch on the Asian market. Are you starting to see growth rates there that are close to pre-COVID levels, or still not yet? Yeah, certainly it's a geography that was very impacted during COVID window of time. And you know, our business there is even more dramatically in the favor of service, excuse me, software. Overall, as a company, 60% of our revenues are sourced in software, 40% in consulting services. And our Asian market is more predominantly software. We benefit in that regard in the sense that our renewal rates are very high. Our software is very sticky. And you know, a typical quarter overall, revenue, sorry, software side is sourced 80% in renewal and 10% in upsells, 10% in new logos. The Asian market, therefore, during that COVID window of time, that upsell and that new logo line was impacted. Coming out of it, a bit slowly and, again, you know, better this year than it was last year, is the tagline. And, you know, we see, you know, rich opportunity there. It's always been a good geography for us. And, we expect it to grow, you know, in lockstep with growth opportunity in North America. In Europe, we, from a historical point of view, we're more predominantly focused in North America, the largest drug development, you know, geographic market. We've focused on that over the last few years and see opportunity for the European marketplace to contribute a little bit more quickly to our overall growth. And interestingly enough, the Latin America market, well, being primarily focused in generic drug development, is a growth opportunity for us as well. So like across our business, things are improving, and Asia fits into that character as well. Great. And then on GastroPlus, can you give us an overview of what that is, the technology there, and then, y eah, I guess that's it. But it's the largest revenue generator for the company, is it? That's right? Yeah. GastroPlus was the founding product of the company in the late 1990s. It is what's called a PBPK platform, physiologically based pharmacokinetics. We live in a world with a lot of acronyms, and I try to minimize them as best I can. But as I said, modeling and simulation uses a number of different techniques and tools. PBPK is one of those types of modeling that is applied in many different ways from a time continuum. It is typically engaging in the clinic, early clinical timeframe. Its value is being drawn into discovery. The more you can predict and anticipate in that lead optimization process, the better off you are. But its sweet spot is in early clinical and then extending through the entire clinical process. It's a tool that is used to combine both a drug model and a biological model and therefore is utilized for first-in-human studies, translating animal results into how will that drug operate in human? What should we define as its first first-in-human dosing regimen as an example. Extending out to being used to simulate changes in the formulation of a drug after it's been approved and addressing bioequivalence studies to demonstrate that a formulation change in a drug after approval is equivalent to that formulation that was utilized in the approval process. Its applications are many, across the continuum of drug development. Yeah, it's our flagship software platform, contributing the largest portion of our software revenues. But we operate with three key platforms in their software portfolio. ADMET Predictor, I've mentioned, the tool that's used in discovery. GastroPlus, which is what I've just described. And the third platform is branded Monolix. It is what's called a PK/PD tool. Another acronym there, I'm sorry. Pharmacokinetic pharmacodynamic tool is a tool that's used in profiling a drug, utilized keenly in phase II, phase III timeframe of a drug's development. Very focused on dosing regimen, patient population. Data is used to then simulate a clinical trial to allow for that iterative process to improve your protocol, to improve the likely success of the clinical trial. Monolix is probably our second largest contributor in terms of software revenues here at Simulations Plus. Okay. And you just mentioned the ADMET Predictor. How is this technology differentiated in the market? Yeah, ADMET Predictor is a tool that focuses and provides property predictions, over 150 property predictions, given a molecular structure. And these predictions, we need to pull out our PhDs in physics and chemistry to understand many of them, but they are characteristics that either touch upon key chemical characteristics that would be used as characteristics of evaluating efficacy or toxicity of a molecular structure, predictive efficacy or toxicity. PKa analysis is an example of that. The permeability, the ability of the molecules to be absorbed into the system, manufacturability characteristics, so on and so forth. Well-regarded pKa I use because it's well regarded as the gold standard for pKa analysis based upon the throughput. In this world of AI, your tool, your algorithm is only as good as the data throughput, the data you've used to train the algorithms. And that product has benefited both from years of data as well, importantly, as collaborations with key clients that provides us access to private data not necessarily available as an open source. And that predictor, as well as functionality we call it AIDD. Rather than just simply take that molecule and provide the predictions, the application supports, based upon this analysis of the molecule that you've provided, identify the key characteristics of those 150 predictions that are most important to you, and the product will go forth and find other molecular structures that you haven't input into the ADMET Predictor product, that beat these characteristics. So an iterative loop provides the discovery scientist the ability to evaluate the drugs that maybe other tools have identified, and provide more key characteristics about it that would impact the lead optimization sorting of it. But we'll also go out and search and find other molecular structures that might be even better for the discovery scientists to pursue and look at. A lot of focus in that area, as I said earlier, in terms of AI investment dollars in that space, which are focused on, you know, other inputs into that lead optimization process. Many of those, you know, very visible entities, be it the Recursion, the Valo Health, the Atomwise of the world, that are working on good platforms in that area, they actually are licensees of our technology, our ADMET Predictor technology. Viewed as best of breed. It's, it's the tool of choice in a process that requires a number of different, different tools to get to the right answer. Got it. Okay, great. And then you've stated you're focused on maintaining profitability, but also growing the top line. Where are the opportunities for growth, both in the near term and long term? And do you think there is opportunity to grow a little faster internationally? Well, I'd say in general, you know, biosimulation market, you know, 15% growth, 12%-15% growth is sort of the consensus in terms of independent research. Sounds about right, based upon my experience. Our view is that, you know, we, given the breadth and capabilities of our product, the quality of them, our position in the marketplace, a trusted vendor, we should always be able to beat that, that overall growth rate in terms of the, the market as a, as a whole, and we've generally done that. Last year, we grew 10%, that wasn't a year in which the overall market grew at that 12%-15% rate. I think we did pretty well. This year, we're anticipating guiding 10%-15% growth. I think in the long run, that 15% organic growth is a good marker for us to be shooting at. Very profitable model. Flow through in terms of EBITDA and free cash flow are rich. We've, you know, focused in maintaining that profitability model throughout, but also recognize that top line growth, revenue growth is very important. We supplement our organic growth strategy with an acquisition strategy. Closed our last acquisition in July of last year, I believe it was. We'll look to continue to supplement and add to our product portfolio, product service portfolio, add to our team. New opportunities within this modeling and simulation world out there to allow and support accelerated growth on our part. So yeah, you know, a better than market organic growth at or above 15%. And supplement that with acquisition growth. You know, those are our aspirations while maintaining the profitability model that we have. A key ingredient to that is maintaining our differentiation of larger mix of software revenues to consulting revenues in a market that, you know, drug development outsourcing and service-based use activity is enjoyed in that industry. We look first and foremost to be the provider of tools for our clients to do modeling and simulation internally for their needs. Got it. Okay. You mentioned acquisitions. Would you use cash on the balance sheet for that going forward or different method? We've, you know, I think we've done six acquisitions, five, six acquisitions over the years. You know, majority of them have used a mix of cash and equity. The last acquisition we did, circumstances drove it to be a cash acquisition. You know, we're well-funded on our balance sheet. We did a capital raise back in 2020 that funded the balance sheet nicely to support both the internal needs as well as support acquisitions on a go-forward basis. You know, earlier in 2023, we did a stock buyback as well, just simply because our model does produce good, healthy free cash flow every year. You know, as we do acquisition replenishes that balance sheet quite nicely. So, you know, we would look to do a mix in terms of a starting point of any look at an acquisition. We'd like to do a mix. I always think it's good to, you know, use a little equity to keep the incoming owners to the extent that they participate in the transaction motivated on a go-forward basis. But circumstances don't always allow that. And, you know, if cash is the requirement to get the appropriate deal done, then that works as well. Okay, thanks. And then, last one from me. You recently had a version update with GastroPlus. Looks like you have another one coming later this year, and then version update with ADMET Predictor this summer. I guess, how often do you have software updates, and how do these impact your sales cycle? Yeah, the, you know, the, the company is always across its platforms, all three, software platforms, get releases on an annual basis. The addition of new functionality, the improvement of the models contained in those platforms as, more data is used to perfect them. Ever improving the horsepower in terms of computational speed, improvements in the, workflow and, and front end, the GUI, front end, the client's experience in using the product. All of these are focus areas that, as, improvements are made, we'll bundle them on at, at least an annual basis and, and, deliver releases, in each of those areas. You know, the improvement in terms of impact on revenue, it first and foremost contributes to that very high renewal rate on our existing installed base. About 95% renewal rate on fees is where we typically come out at on a quarterly basis. But it also these new functionality extends the product's capability into new areas, which are coming to bear in industry. And as the ways in which you can use the product increase, the number of people you need to employ to apply those increases, the number of seats that we sell through to our installed base increases and supports obviously new logo acquisition as well. Pretty consistent delivery of new releases across our software platform on an annual basis to support both the existing installed base, their acquisition of new and additional licenses, as well as our closing on new customers, new logos. Okay. Well, I think that about does it, Shawn. We really appreciate you joining our conference. It's been great talking to you. Very good, Steve. Appreciate it very much, and hope everyone out there is having a good conference.