| Small and Micro cap project
Simulation Plus: Signs of Moat
Simulations Plus is a developer of ground-breaking drug discovery and development software for mechanistic modeling and simulation, and for machine-learning-based prediction of properties of molecules solely from their structure.
GastroPlus, the company’s flagship product, is currently the largest single source of software revenue. It is currently the most widely used commercial software of its type by pharmaceutical companies, the FDA, the U.S. National Institutes of Health (NIH), and other government agencies in the U.S. and other countries.
(a) Only one significant competitor
As per the company’s 10-K, GastroPlus has one significant competitor and has a high barrier to entry, as it would be difficult to validate new software to levels required to support regulatory submissions.
Because of the widespread use of GastroPlus, the company was the only non-European company invited to join the European Innovative Medicines Initiative (IMI) program for Oral Bioavailability Tools (OrBiTo). OrBiTo was an international collaboration among 27 industry, academic and government organizations working in the area of oral absorption of pharmaceutical products.
(b) Renewal rates
In the past three years, that company generated roughly 69%-80% of revenue from renewals. The company’s renewal rates were 85% based on accounts and 93% based on fees.
(c) Possible deep learning curve
Generally speaking, simulation software takes time to learn. If the company’s product has a steep learning curve, users are reluctant to switch. Moreover, if the company’s product is integrated into a user’s process or system, it makes the switching decision even more difficult. One can learn a lot by probing the users of the software.
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