Simulations Plus' (SLP) CEO Walt Woltosz on Q2 2016 Results - Earnings Call Transcript

| About: Simulations Plus, (SLP)

Simulations Plus, Inc. (NASDAQ:SLP)

Q2 2016 Earnings Conference Call

April 13, 2016 04:15 PM ET

Executives

Renee Bouche - IR

Walt Woltosz - Chairman and CEO

Ted Grasela - President

John Kneisel - CFO

John DiBella - Vice President, Marketing and Sales

Analysts

Howard Halpern -

Operator

Good afternoon. Today is Wednesday, April 13, 2016 and on behalf of Simulations Plus, I welcome you to our Second Quarter Fiscal Year 2016 Financial Results Conference Call and Webinar. Presenting this afternoon will be Chairman and CEO, Walt Woltosz; followed Chief Financial Officer, John Kneisel, Vice President of Marketing and Sales, John DiBella and our President, Ted Grasela.

An opportunity to ask questions will follow today's presentation. [Operator Instructions] This call is being recorded for playback at our website www.simulaitons-plus.com. Before we begin today’s presentation, I’ll read the Safe Harbor statements. 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 as filed with the Securities and Exchange Commission.

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

Walt Woltosz

Thank you, Renee and welcome everyone to our second quarter investor conference call. Highlights for the second quarter, another very good quarter. Software renewal rates 85% based on number of accounts and 91% based on fees. We added 20 new software client sites. We have announced the development of a new product that will be coming out soon, called PKPlus. This is a product that is designed to perform what we call non-compartmental analysis and compartmental analysis for regulatory submissions and we believe this product has the potential to become a significant contributor to revenues and earnings.

We are also working on Version 9.5 of GastroPlus having released 9.0 few months back. 9.5 is going to add intramuscular dosing, so we have had dosing through the skin transdermal dosing. Now, this will be injection into a muscle and various muscles around the body have to be treated little differently. And then also enhanced ocular dosing model, and both of these efforts are being supported by two funded research collaboration agreements or RCAs we call them with the Food and Drug Administration.

We will also be adding anti-body drug conjugates. This is where an anti-body access a carrier for a small drug molecule and it takes it to the target tissue. And we are adding some new animal physiologies for the additional dosing routes. Additional dosing routes is the dosing routes other than intravenous or oral. So this is a ocular, nasal and pulmonary, transdermal and now as you see intramuscular.

We are working on version 8.0 of ADMET Predictor. This is a major overhaul of the user interface, major code refactoring and much tighter integration with MedChem Studio. Both programs will be open from the same opening screen, also both programs will be embedded into single interface and the tight integration between the two we believe will help users of each program gain interest in the other program.

We also finalized version 5.0 of our DDDPlus software. This is a software that simulates in vitro or laboratory experiments for how tablets and capsules and so on dissolve in the in vitro environment. So we have added several new dosage forms, we have added disintegration for tablets, we have added biorelevant solubilities and what that means is fluids that simulate intestinal fluid either in fasted or fed state or the gastric fluid, the fluid in the stomach. And then we have also added the tablet compression model.

In addition to the software, our consulting services continue to grow, and we had a very nice announcement from our Buffalo division of a $4.7 million, 5-year, up to 5-year, we have to perform, so hope to get each renewed [ph], contract with a major research foundation that has requested that we not reveal their name. This is a new business line in a sense that’s doing what we have done, but doing it on a much bigger scale, integrating information from organizations around the world involved in types of drug research, and Ted will be talking about that in few minutes.

I mentioned that we have two funded collaborations with the FDA. We finished our first year of a RCA, research collaboration agreement and that contract was renewed for the second year and that’s the one for improving our simulations for ocular dosing. We met all of our milestones during the first full year; we established a nice consortium of leading pharmaceutical companies who participate with us in this collaboration. And just by the way, the global ophthalmic drugs market was valued at $16 billion in 2012 and expected to reach $21.6 billion in 2018, so it is a growing market. And part of that is because of prevalence of eye disorders is increasing such as diabetic retinopathy and macular degeneration.

We also began the first year of another up to three year of $200,000 per year collaboration and for this one; we are looking at simulating long-acting injectable microspheres. These are small polymer spheres that contain drug particles and released the drug over typically very long periods of time, sometimes even over months. Here again, we formed a nice consortium of industry partners, FDA scientists and Simulations Plus, and we have added the intramuscular dosing to test version of GastroPlus that will become part of version 9.5. And correlated with that, we are also enhancing DDDPlus to simulate the in vitro. This solution are released from these polymer microspheres.

We also continue to explore opportunities outside of the pharmaceutical industry, both in aerospace and in generalized healthcare. We have mentioned this before. We’ve sort of put these on hold right now because the development team for these is intensely involved on finalizing the PKPlus product.

So overview, we are of course a major provider of software and consulting services for pharma R&D, all the way from the earliest drug discovery through pre-clinical development, first-in human trials. With the addition of our Buffalo division a year and half ago, now Phase 2 and Phase 3 clinical trial analysis, and then beyond patent life to supporting generic companies. So basically soup-to-nuts, everything from when a chemist first draws a molecule until generic companies are putting a new generic form of a product that’s going of [ph] patent on to the market.

We continue to enhance every existing software product and developing the – finalizing the development of PKPlus. We feel this is a very exciting new product with a very good potential. And we are continuing to develop the new applications in aerospace and healthcare, and we will get back on that fairly shortly once we get first version of PKPlus released.

Our second quarter revenues were up by $590,000, 12.9% to $5.6 million. Net income for the second quarter up $175,000 or 18% to $1.15 million. And our diluted earnings per share for the second quarter up 16.9% to just under $0.07 a share compared to just under $0.06 a share in last year’s second quarter.

For the six months, our revenues were up by $1.34 million, 15.5% to $10 million, and our net income was up over 50% by $753,000 to $2.25 million. Our diluted earnings per share up 49% for this first six months to $0.131 a share compared to just under $0.09 in the second quarter of last year.

So we have seen continued growth on an eight-year plus profitable trend, successful strategic acquisition, increasing customer base every quarter, we are adding new software customers, 20 new customers in the second quarter, 91% renewal rate on fees and expected continued compound growth. Earnings per share up 17%, strong cash position. We are still returning cash to shareholders. We continued to pay the dividend of $0.05 per share per quarter. That’s always subject to the vote of the Board of Directors each quarter, but we don’t anticipate a change. And over $15 million in cash dividends have been distributed since 2012 back to our shareholders. Net cash still remains just under $9 million as of yesterday.

So I will hand it over now to John Kneisel, our Chief Financial Officer.

John Kneisel

All right, thanks, Walt. We will go through the first [ph] quarter first and then we will cover the six months and then go over a few with the slides and graphs. The first three months, here the last three months, the consolidated revenues, as Walt said were up 12.9% or $590,000. $245,000 of this increase was generated by the Buffalo division, which is a 19% increase over the prior year. And revenues from the Lancaster division were up $344,000 or 10.4% for the quarter.

Consolidated software and related sales were up 15% and while consulting and analytical revenues increased about 9% for the quarter.

Cost of revenues were up $133,000 for the second quarter. Most of this increase is attributable to the first annual bonuses paid to the employees in our Buffalo division. Other than that, there were really no other significant changes in cost of revenues. And cost of revenues as a percentage of revenue remains relatively constant.

Our gross profit for the quarter increased 13.3% or $457,000. Gross margin in our Buffalo division was 55% and in Lancaster division was 84%.

SG&A for the quarter increased $116,000. The main components of that were commissions to our Japanese and Chinese dealers of about $31,000. We increased our marketing labor during the quarter and the time spent by the scientific personnel on marketing activities was up about $24,000 and advertising was up about the same amount, another $24,000 as we increased our web presence and incurred other advertising related costs.

Our professional fees were up this quarter. It’s really the result of the additional costs of being a consolidated entity and other tax and accounting compliance related issues. There were really no major decreases in the quarter.

We have spent about $739,000 on research and development costs during this quarter. And of this amount, $278,000 was capitalized and $461,000 was expensed. Our tax provision with the increased income was up, but our effective tax rate remained fairly constant during the period, just under 32.5%, which is about where it was last year.

Net income for the quarter was up $175,000 or 18%. And our EPS, as Walt said, went to $0.07 a share versus $0.06 a share. For the six months, can you change the slide there, there we go. For the six months, consolidated net revenues increased 15.5%, we hit $10 million for the first six months of the year, $538,000 of the increase came from Buffalo represented 22% increase over the prior year. The net revenues from Lancaster increased $804,000 or 12.9%. And our software and software-related revenues were up 13% while consulting for the six months was up about 20% or $545,000. The cost of revenues increased by $172,000, the majority of this is what we talked about before which was the annual bonuses paid to people in Buffalo which was a $130,000 for this period and again there were no other really significant increases in costs or decreases for that fact.

Consolidated cost of revenues as a percentage decreased from 25.1% down to 23.5%. This change really mainly comes from the increased sales with relatively fixed and constant expenses and cost of revenues. Our gross profit increased $1.2 million or 18%. Gross margin from Buffalo showed a 59% gross margin for the period, six months and Lancaster should 84% gross margin for the six month period. Going onto SG&A costs, they were up $228,000, of which about $30,000 was commissions to the Japanese dealers, $42,000 was advertising as we said before we've increased our web presence and incurred other advertising related expenses.

Walt Woltosz

John, I think you meant we were down $228,000, you said up.

John Kneisel

Oh my fault, read it wrong. Marketing labor increased by $38,000 and the software licenses we expensed another $28,000 and this is really basically due to our outside software licensing that we have just hit another tier, a layer in that tier. And we did have one major decrease which amounted to $228,000 decrease and that relates to the consulting fees that we paid in 2015 related to the Cognigen acquisition and we didn’t really have any of those expenses in this period. For the quarter, we spent $1,360,000 on research and development and $545,000 of this capitalized software and $813,000 was expensed. Moving on to the provision for income taxes, we’ve seen an increase in our income taxes and some people would say that’s a good thing with increased revenue. Our effective tax rate increased to 34% from 31% the prior year that's really due to the increased income and the effect of our R&D credits and other credits have on our tax provisions. Those credits generally tend to stay fairly constant throughout the entire time of the year.

Our net income overall was up $752,000 or 50% over the prior year six months, $2.25 million in 2016 and $1.5 million in 2015. And the increase comes from really two main sources, the increased revenues that we had which had high margins, we picked up good bottom line income and the reduced expenses that we had in SG&A in 2016. Overall, EPS went from $0.09 to $0.13 in the period. Moving on to the first slides here, our consolidated revenues showed a consistent growth for the quarters, since the first quarter of last year with Cognigen, you can see the jumps across the board here. Acquisition really shored up our revenues in the fourth quarter of the year. For those of you who haven’t followed Simulations Plus for very long, our fourth-quarter revenues tend to be lower mainly because those are summer months and the pharmaceutical industry doesn't simply buying as much in those periods. Going on to the consolidated gross profit that’s tracking relatively the same as revenue as we would expect with our margins.

Consolidated net income, we see the same general trend except for the first quarter of ‘15 where it shows a $0.53 in that period. That was the period in which we paid out the $400,000 in consulting fees. The current year results really show sort of the unencumbered earnings based on without all those additional costs that we put in and both for actually 2014 also when we were preparing for the acquisition and 2015 when we paid out the final amounts. Diluted earnings per share is expected, quarterly earnings per share followed along with the revenues and the profits. We haven’t really issued any additional shares so those two should track together. As we go on, in EBITDA again really shows the increases that have come a lot of our substantial portion of our costs are now are the amortization of costs associated with the royalty agreement and so that helped out in increasing EBITDA. Current cash as it a backup over $8 million or $ 8.8 million as of yesterday. We know that about $1.5 million of that is going to be distributed in the next three months here, about three months for the royalty agreement that we pay every year. We have $750,000 payment due here in April and then next year we have $1 million payment that will cover and clear of everything that we’ve owed under that. And then we also owe another 700 and some thousand dollars to the former shareholders of Cognigen the summer. I won’t belabor all the points in here but we consider our balance sheet to be really strong. Company is very liquid and especially well capitalized for a software and R&D type company.

And with that we move onto John.

John DiBella

Okay, thanks John. And apologies in advance to the audiences as I’ve come down with a cold over the last few days and sound more nasally than usual. In case we have anyone new to the company on the call today, I just want to briefly describe our products and services and where they fit into their drug development process. In a nutshell we offer end-to-end solutions which span from early discovery going all the way through clinical development and regulatory filings. Our of Cheminformatics software which consists of the ADMET Predictor, MedChem Studio, and MedChem Designer platforms allow research scientists to design new compounds and virtually screen them across the spectrum of properties really helping to prioritize testing as you go downstream. The simulation software which consists of the GastroPlus, DDDPlus, MembranePlus and new PKPlus platforms help scientists model and predict complex in vitro experiments and ultimately the in vivo exposure seen in animals and humans.

And KIWI is a cloud-based validated platform for managing and communicating pharmacometric projects and results. And all of these software tools from discovery going through development are complemented by a team of expert scientists who can provide consulting support project-by-project basis. Next slide. Diving a little bit deeper into the products themselves. Walt’s already talked about our software development team being very hard at work on new releases of all programs. The next version of GastroPlus which is the flagship product is expected sometime this spring and will include a new optional add-on feature for intramuscular dosing and also enhancements to our recently released biologics module which we expect will help deliver more sales of that feature.

The Cheminformatics development team as Walt mentioned has been really hard at work on refreshing the ADMET Predictor interface utilizing a lot of the existing features from MedChem Studio. The optional add-on module that's been added to ADMET Predictor we think is going to lead to increased adoption of the program by medicinal chemistry especially which is a target market for us within the pharmaceutical space that we haven’t penetrated enough yet. We're really excited about the release of DDDPlus 5 and we recently hosted a webinar about two weeks ago with over 200 people registered describing the various new features and improved synergies with GastroPlus. And we really hope that the changes that we’ve made to DDDPlus and later in the year that we’re going to make to MembranePlus will increase the exposure of these programs and be solid revenue drivers for us. And then finally, as Walt mentioned earlier we are really excited to be adding a new standalone program to our portfolio in 2016 which is going to be called PKPlus. This program being targeted to scientists who perform routine PK modeling in the preclinical or clinical settings and we’ve really designed the program's workflow and interface to help automate many of the tasks that are going to be required for submitting necessary reports for regulatory filings. Based on some initial feedbacks there is significant enthusiasm for this low-cost high volume tool and we are really excited to release it soon.

Next slide. John has already discussed the Company's strong performance in Q2 and here I'd like to just simply describe a few highlights. Our consolidated software revenue growth for the quarter was 15% and this was due to our ability to maintain solid renewal rates and also generate new license sales. Now one note to make here and we did mention this in the preliminary revenue release that we had back in December or excuse me in early March was that due to some unique circumstances at several companies including some employees taking maternity or paternity leaves in Europe, the renewal rates were bit below our historical averages as companies decided to postpone renewing until new hires were in place. We do believe that these sales are going to be coming back to us in future quarters though it's a little difficult to say exactly when.

Consolidated consulting revenue increased by 9% in Q2 with significant growth coming from additional work seen in Buffalo. As you can see in the bar chart in the upper right we had a 16% increase in the number of software units licensed. And this was driven by the addition of 20 new software clients in Q2 including a dozen commercial clients. And just as a reminder, for us a new client is defined as a brand-new company or organization which is never licensed our technology before or an existing group that is adding licenses in new departments or research sites. For the quarter, you can see in the pie chart in the lower right, software license revenue was approximately 68% of the total with consulting and training making up the remaining 32%.

Next slide. For the first six months of 2016, numbers are again very strong when compared to the same timeframe in 2015. Consolidated software revenue growth was 14% with a 25% increase in the number of software units licensed and this increase in the number of units licensed was driven by large orders coming from the US and China FDAs. Consolidated consulting revenue increased by 20% in the first six months with again significant growth coming from the additional work at Buffalo.

Next slide. We continue to see nice expansion around the globe and this is kind of evident from the breakdown of software revenue by geographical location. We saw a slightly higher than normal percentage of software business coming from the US, but still have strong performances in Europe and Asia in Q2 and we are also actively searching for distributors in Korea and India to help us have local marketing and sales and technical support and also to be able to capitalize on some growing opportunities that we’ve identified in those markets and hopefully we will have some distributors in place by the summer time.

Next slide. And then finally, in terms of marketing activities, we officially kicked off our website redesign project in February and we will be spending the next few months working on it and we have an anticipated live launch for July. And then additionally we continued attending and presenting at conferences in Q2 and also hosting on-site training seminars around the globe.

One particular note was that we did successfully host our first GastroPlus workshop in India in February to an overflow crowd and we will continue with an aggressive 2016 workshop schedule. We actually have a team of scientists in Germany this weak hosting our European workshops as we really do believe that education and training of new users are going to be key drivers for continued expansion and licensing of the technology.

And then to help with promotional activities, we do have a very robust social media presence managed by our marketing manager here in-house and also continue to explore other digital marketing opportunities which is complemented by our webinar series and the publication of peer-reviewed journal articles. Happy to report, in Q2, there were nearly 30 journal articles published which cited the use of our software, all of these coming from clients. This is really valuable marketing collateral for us as it shows prospects, how their peers are applying the technology on real case studies.

And so with that, I am happy to invite Ted to give an update on the Buffalo operations.

Ted Grasela

Thanks very much, John. So I’d like to walk through the activities that Buffalo division has been engaged in over the past three months and in particular talk a little bit about what’s happened with the KIWI contract that we have. So just to provide an overview and remind everyone about what we're doing in Buffalo, we primarily provide consulting services for pharmaceutical industry and so one of the reasons why we were eager for the merger with Simulations Plus was to realize some of the strategic and synergistic benefits of being able to apply programs like GastroPlus to clinical pharmacology problems which has happened later in development.

And over the past six months, as I have talked previously during these calls, we look forward to remarkably strong collaborations between our groups and have really been working hard to identify new and innovative ways of using modeling and simulation to bring value to our clients. So the way that we will get consulting projects is that they actually help to shape management thinking about modeling and simulation and then also help to shape the regulatory decision-making process because those models are then submitted to regulatory authorities and help to contribute to the discussion that goes on about whether a drug should be allowed on the market and how it should be dosed. So the successful projects that we engage in actually help to drive additional consulting efforts as well as software sales.

This is a little brief overview of some of the projects that we've been involved in health. Things are changing. What we've been doing in Buffalo is merging the science and software that’s in GastroPlus that we used to perform physiologically based pharmacokinetic modeling with so-called systems pharmacology models that lets us provide much more mechanistic insight into not only how a drug is distributed, metabolized and eliminated from the body, but also how it exerts its pharmacologic effect.

So we’ve been seeing increased business in terms of the union of these two types of modeling in oncology and diabetes, those are ongoing, but in this last quarter we’ve added additional projects in a growing area of concern called nonalcoholic steatohepatitis which many people believe are related in some way to diabetes and we are trying to understand how that happens and how drug therapy might be useful in that disease. The other area that’s an emerging area for this is in ophthalmology and working with some pharmaceutical companies who are developing therapies for particular diseases of the aging eye.

At the same time that we are doing these systems pharmacology and PBPK models, we are also trying to look for platform opportunities where we refine a model within GastroPlus or a particular setting and then use that same model for different drugs and in that way we can get more efficient and productive with the use of the software and interestingly in one of those successful projects that we have, we are actually shaping the early clinical research program for a drug by being very aggressive in our use of preclinical data and helping scientists to understand how they can interpret that in a more dynamic way.

As an overall report of our consulting projects so far in 2016, we’ve been working on with 22 companies on 43 different drugs, 72 projects occurred during this period and two of them started in the second quarter. In addition we’ve expanded the scope of projects with five companies where the work that we were doing was proving to be useful and the companies have asked us to continue on with the work and to expand into different questions.

Our pipeline is healthy. We have 32 outstanding proposals that we are waiting to hear on for the remainder of the year. We worked with seven new companies over the past year and so we are continuing to build relationships with companies that we had not worked with before. Our most common therapeutic area is oncology followed by neurology and immunology. And it’s important to remember that one of the reasons why we do this modeling simulation is to have an effect on the regulatory interactions with pharmaceutical company and biotechnology companies have with regulatory agencies. So, about 25% of the projects that we work on in any given year end up being reported or submitted to regulatory agencies for their consideration.

In addition, this past couple of weeks ago, we had a first time presentation of ADMET predictor that what John had talked about previously at a clinical pharmacology meeting and it was very interesting to watch the new kinds of conversations that we are coming up with this new community of users who haven’t had exposure to those capabilities in the past.

So I wanted to touch on KIWI for a bit and for those of you who haven’t been on the call before, one of our interests in Buffalo has been to try to understand how we can bring order to the very complicated and messy business of performing data analysis during the research and development lifecycle. So we have data and inputs that come from many different groups and interdisciplinary group of scientists are really charged with performing a careful synthesis of all of these different inputs and communicating with one another. But what’s happened over the past several years with the introduction of cloud computing is the industry has acquired enormous computing power, but we believe that the industry basically lacks the tools for harnessing that power and that was the original vision for KIWI and it remains our focus.

Next slide please. So this is just our schematic of illustrating how KIWI which is represented by that dotted box in the middle serves as the interface between clients who come into our web server through a firewall from the web browsers that access the tool kit that’s present within KIWI and then those tools submit jobs to the grid, receive the results of those analyses and then input the data into a storage facility and other functionality of KIWI allows the scientists to organize that – the results in the storage facility and communicate that with the managers, with other peers and so forth.

Next slide please. So we’ve designed KIWI to be a validated tool so that clients can feel comfortable that everything that they have been doing with KIWI is validated and there would not be issues in the submission of those results to regulatory agencies. For the past two years we’ve been talking to a variety of clients about the value and capabilities of KIWI and it was recently announced that we signed a $4.7 million contract with a major foundation to implement an instance of the KIWI platform for global teams that are engaged in model-based drug development for a particular disease. As Walt mentioned previously, it's a five-year term for this contingent on us meeting milestones.

This is obviously great news for us and for several different reasons. Number one, KIWI is going to become an integral driver of the foundation’s efforts to accelerate the eradication of the disease that they are interested in because it's going to provide much-needed support in terms of computer processing power and the organizational and communication tools that I spoke about in the previous slide. Ultimately, in terms of this application of KIWI, the goal is to reduce the cost, reduce the risks and costs of drug development and speed the delivery of new life saving medicine. So it's going to use all of the modeling and simulation tools that we've been using that’s going to embed it into the KIWI platform and facilitate communication of those results.

From our perspective, in Buffalo, the project builds on the extensive process-related research that we've engaged in for many years and enables us to implement substantial enhancements to the KIWI platform. Those enhancements are going to provide a scaffold for applicability to other therapeutic areas that are going to be available to our academic and industry clients of KIWI. And it speaks to our long-term goal of trying to create -- working to create an innovative framework for collaboration that increases the value of emerging scientific research, allows it to be integrated into modeling and simulation activities and then communicating those results to our regulatory agencies, management and the larger scientific community.

So in summary, the Buffalo division is strong and growing. Our revenues and earnings are up and we’re contributing to the overall growth of Simulations Plus. Our consulting activities continue to expand and we are continuing to realize synergies with Lancaster Group and the new contract to enhance the KIWI platform is a major step forward in terms of our long-term vision for the product.

Thank you. Walt, I’ll turn this back to you.

Walt Woltosz

Thank you, Ted, John and John. So to summarize, second quarter revenues up 12.9%, second quarter net income, up 18% and diluted earnings per share [Technical Difficulty] 16.9%. For the six months, revenues, up 15.5%, net income, up by 50% and diluted earnings per share up 49%. Both divisions are performing very well. The synergies we expected are being realized and they are resulting in expanded consulting activities especially in the area of clinical pharmacology taking a look now at physiologically-based pharmacokinetic or PBPK analysis. And so we’re addressing the regulatory agency interests that were brought to the forefront about two years ago when the FDA and some European regulatory agencies both held full day meetings specifically on the topic of applying PBPK modeling into clinical pharmacology.

A five-year $4.7 million contract that Buffalo recently was awarded by a major research foundation is the largest single contract in the company's history. So a very exciting development here and it offers a potential as Ted has explained for additional such contracts with other organizations. Our software sales continue our strong growth trend. You can see the bar charts and see the slope on those quarter after quarter and year-over-year. There was a recent report by Grand View Research that indicates that the global market for computational biology is expected to reach over $4.2 billion by 2020. Now, that includes proteomics, genomics and the type of work that we do. They did mention that North America is the largest regional market at 58%, that was in 2013. I think John DiBella’s chart showed us around mid-50% sales in North America. So very consistent with that.

Asia Pacific seems the fastest growth market with the combined -- estimated combined annual growth rate of about 28%. And our activities in China, India, Korea, Japan have reflected growth in those markets. Interestingly, this report listed five key players [indiscernible] and Simulations Plus. So we’re quite surprised and honored to be the five that they listed. One of the five that they listed and we certainly believe that Simulations Plus continues to lead the trend towards greater use of modeling and simulation and drug development.

And so with that, we’ll stop now and take any questions.

Question-and-Answer Session

Q - Howard Halpern

We have two questions here from Howard, Walt, Howard Halpern. His first question is given the most recent five-year $4.7 million contract, how important do you anticipate the KIWI offering to be in the future?

Walt Woltosz

Well, this is the first time contract of this sort and again, we think this will set an example, it’s going to build the capabilities that we have in Buffalo for doing this type of data management and consolidation and providing access to it globally through our own proprietary cloud. Ted, do you want to comment any more on that?

Ted Grasela

Sure. I think Howard you can tell from the enthusiasm in my voice that we’re very excited about this. We've had a lot of hope and dreams for KIWI and what it could represent in the future and so this represents an important validation of the way that we were thinking about communicating complicated modeling and simulation results and enabling interdisciplinary collaboration which really is the big deal to unlock the needed productivity growth in the industry. So we’re just very excited about it and we think that as we add capabilities to the software that others will take notice and we’ll be able to get more customers for it.

Walt Woltosz

Thank you, Ted.

Howard Halpern

And Howard had a follow-on question, how will the revenue from the $4.7 million contract be recognized?

Walt Woltosz

Ted, do you want to answer that?

Ted Grasela

Sure. So we’re still working that out right now. We think more or less it's going to be a linear recognition over the life of the contract there. Money is in there for hardware and software licensing that we’re going to need and so we’re in the process of doing all of the necessary development of plans and so forth. So we will have to see how that actually works out.

Walt Woltosz

I think considering the upfront investment in some hardware, it might be just a little bit frontloaded, but it's probably not that significant. We will buy the hardware it wants and then perform. So after that, it will be the labor.

Ted Grasela

Exactly, thank you.

Howard Halpern

And Howard has another question, this is concerning PK Plus, once PK Plus is released, what type of sales cycle do you anticipate?

Walt Woltosz

John DiBella, do you want to take that one?

John DiBella

Sure. I will offer some thoughts. I expect the sales cycle for PK Plus to be a bit shorter than what it is for our research software. The equations in PK Plus and the results that are generated from the program are relatively straightforward. So I think we will be spending the majority of time during a client’s evaluation period, highlighting the usability and the workflow aspects and less time focused on the accuracy of the results that are being generated. Also, PK Plus is going to be a low-cost product and we have strategically priced it at a level, which requires only a very small number of approvals within a company. So I think that the evaluation period is going to be focused a little bit more on usability aspects, which makes our lives a little bit easier when companies really want to test the accuracy of models, utilizing their own data, that part should be relatively straightforward and then the way in which we priced it, the approval process should also be a lot faster than it is for some of our higher priced research tools.

Walt Woltosz

Thanks, John. As John pointed out, the science side of this type of software is nowhere near as complex as physiologically based pharmacokinetic modeling. All of the equations in PK Plus is on two pages in the manual, it's really more how do you deal with -- how do you have validation that every possible option or setting that you have is going to work properly and give the right numbers, how do you have the appropriate audit trails, so that you can go back sometime later and say all right, we are looking at this report, where did this number come from, who ran this analysis, what were the model settings that they used and so on.

And so the program scientifically, you could do all of this in Microsoft Excel and in fact one of the ways we validated is to write the same equations in the Microsoft Excel and then run all of the possible scenarios in that program and some other programs and in PK Plus to make sure that all the numbers agree within like .0001% or some tiny number. So it's really more the data handling, the workflow, the convenience, the program is pretty well point in -- it is a very little typing needed, which will enhance the potential for typing errors and so it's just a very smooth integration and workflow of the type of work that is done with this type of program. And there are thousands and thousands and thousands of other licenses for typically a small handful of other programs that are out there. We believe that the functionality we put into PK Plus will really make it stand out from the crowd and the pricing is we’re not giving it away, but it is very attractive pricing.

Walt Woltosz

I don't see any other questions. Okay, I don't see anything else, Renee. I'll hand it back to you.

Renee Bouche

All right. Well, thank you, Walt and all of you gentlemen for this excellent presentation today. With that, we conclude today's conference call. If you missed any part of today's presentation, a replay will be available at our website www.simulations-plus.com. And thank you all for joining us today.

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