Simulations Plus, Inc. (SLP)

Executive Summary / Key Takeaways

• Software as Critical Infrastructure: Simulations Plus's software segment generates 79% gross margins and acts as non-discretionary infrastructure for pharma clients, delivering 12% growth even as customers scrutinize spending, creating a durable earnings floor that competitors cannot easily displace.

• Services Segment in Cyclical Trough: The services business, despite 15% reported growth in fiscal 2025, faces an anticipated 9-13% decline in fiscal 2026 due to biotech funding pullbacks, client cost constraints, and a $2 million cancellation, exposing SLP to pharma budget cycles and compressing overall margins.

• Strategic Reset Creates Near-Term Pain, Long-Term Optionality: The June 2024 Pro-ficiency acquisition ($100.2 million) and subsequent functional reorganization triggered a $77.2 million impairment and 10% workforce reduction, but positions SLP to double its addressable market by penetrating clinical operations and medical affairs budgets.

• AI Integration as Pricing Catalyst: New releases including GastroPlus 10.2 with AI automation and ADMET Predictor 13 enable more aggressive price increases through premium modules, potentially accelerating software growth from the current 12% pace if regulatory adoption of in silico methods continues.

• Valuation Reflects Uncertainty, Not Distress: At $18.43 per share, SLP trades at 4.3x EV/Revenue with zero debt and $32.4 million in cash, offering downside protection for a business with 58% gross margins and positive free cash flow, while embedding modest expectations for the services turnaround.

Setting the Scene: The Convergence of Biology, AI, and Regulatory Science

Simulations Plus, founded on July 17, 1996 in California and now headquartered in Research Triangle Park, North Carolina, occupies a specialized but increasingly vital niche in pharmaceutical R&D. The company provides modeling and simulation software that enables drug developers to predict how molecules will behave in the human body—absorption, metabolism, toxicity, and efficacy—without relying solely on animal testing or costly clinical trials. This model-informed drug development (MIDD) approach has evolved from academic curiosity to regulatory necessity, with the FDA actively promoting new approach methodologies (NAMs) to reduce animal testing and the NIH announcing it will no longer fund grant proposals relying exclusively on animal data.

The business model splits into two distinct segments with radically different economics. The Software segment (58% of fiscal 2025 revenue) sells licenses for platforms like GastroPlus, ADMET Predictor, and MonolixSuite that integrate AI and machine learning to predict molecular properties and simulate physiological responses. These tools become embedded in clients' R&D workflows, creating high switching costs and recurring revenue streams. The Services segment (42% of revenue) provides scientific consulting—pharmacokinetic modeling , quantitative systems pharmacology , and medical communications—where SLP's scientists augment client teams on a project basis.

This bifurcation defines the investment thesis. Software delivers 79% gross margins and grows steadily even when pharma budgets tighten, because it represents critical infrastructure that clients cannot easily remove without disrupting their modeling and simulation capabilities. Services, despite 30% gross margins, faces cyclical pressure because clients can delay or cancel projects when funding evaporates. The strategic challenge is whether SLP can leverage its software moat to stabilize services while expanding into adjacent budgets through AI-driven automation and the Pro-ficiency training platform.

The competitive landscape intensifies this tension. Certara (CERT) dominates with $415-420 million in annual revenue and 34% EBITDA margins, offering end-to-end platforms that compete directly with SLP's GastroPlus and MonolixSuite. Schrödinger (SDGR) focuses on physics-based molecular discovery, while Dassault Systèmes (DASTY)' BIOVIA division provides enterprise-scale simulation tools. Open-source alternatives and in-house pharma development create constant price pressure. SLP's differentiation lies in its regulatory-grade mechanistic models—particularly DILIsym for liver toxicity, used by the FDA—and its AI integration that accelerates simulation interpretation. However, its $79.2 million revenue scale is a fraction of Certara's, limiting R&D firepower and global reach.

Technology, Products, and Strategic Differentiation: AI as the Next Growth Vector

SLP's product portfolio spans the drug development lifecycle, but three platforms anchor its competitive position. GastroPlus ($22.1 million in fiscal 2025 revenue) simulates drug absorption, biopharmaceutics , and pharmacokinetics, helping developers optimize formulations before human trials. The May 2024 release of version 10 (GPX) introduced a redesigned platform with integrated machine learning, while the September 2025 GPX.2 update added AI-driven automation and an "Orchestrator" package that executes complex workflows with single-click operation. This matters because it transforms GastroPlus from a point solution into a productivity engine—clients can process more compounds faster, justifying premium pricing even as they scrutinize module configurations to save money.

ADMET Predictor ($7.7 million revenue) uses AI to predict absorption, distribution, metabolism, excretion, and toxicity properties from molecular structures. Version 13, released in June 2025, enhanced model accuracy and expanded the AI-driven drug design module to evaluate up to 10 million molecules overnight. This implies that as pharma companies face pressure to "fail fast" and reallocate resources to high-probability programs, ADMET Predictor compresses early discovery timelines, delivering measurable ROI that clients can defend to budget committees. This creates pricing power—management plans "more aggressive" price increases tied to AI capabilities, expecting renewal rates to recover from the current low-80s toward the historical 90-95% range as consolidations abate.

MonolixSuite ($9.4 million revenue) provides population pharmacokinetic modeling, competing directly with Certara's Phoenix. While growth has been impacted by client consolidations, the platform's interoperability with GastroPlus and ADMET Predictor creates a unified ecosystem that reduces data translation errors and accelerates regulatory submissions. The strategic value is stickiness: once clients standardize on SLP's suite, switching to competitors requires retraining staff, revalidating models, and risking regulatory delays—costs that far exceed SLP's license fees.

The Pro-ficiency acquisition represents SLP's most significant strategic bet. Purchased for $100.2 million in June 2024 and merged into the parent company in January 2025, Pro-ficiency's adaptive learning platform trains clinical trial sites on protocols using simulation-based training. This opens two new budget pools: clinical operations and medical affairs. The thesis is that modeling and simulation expertise can extend beyond R&D into trial execution, creating cross-selling opportunities and doubling SLP's addressable market. However, the integration has been rocky—Pro-ficiency revenue underperformed forecasts, contributing to the $77.2 million impairment charge and 9-13% decline in services guidance. The significance of this is stark: if SLP cannot prove that its scientific credibility translates to clinical operations, the acquisition destroys value and distracts from the core software moat.

The AI strategy aims to salvage this narrative. By embedding AI "copilots" like Assessments Plus (instant simulation recommendations) and GastroPlus GPT (24/7 technical support) across all platforms, SLP can monetize through premium modules while making its tools indispensable to both expert modelers and novice users. The cloud platform under development will connect these capabilities, enabling continuous updates without disrupting clients' IT environments. Success means higher ASPs, faster release cycles, and differentiation against Certara's more traditional licensing model. Failure means R&D spending yields no pricing power, compressing margins further.

Financial Performance & Segment Dynamics: A Tale of Two Businesses

Fiscal 2025 results reveal the stark divergence between segments. Total revenue grew 13% to $79.2 million, but the composition tells the real story.

Software revenue increased 12% to $45.8 million, with GastroPlus up modestly, ADMET Predictor showing strength, and MonolixSuite pressured by consolidations. The 79% gross margin declined slightly due to $2.1 million in amortization from the Pro-ficiency acquisition and capitalized software costs from the GPX release. This matters because it demonstrates the durability of software economics—even with acquisition drag, margins remain in the high-70s, supporting the "critical infrastructure" thesis. Clients may scrutinize module configurations to save money, but they are not reducing seat counts or platform licenses, preserving the revenue base.

Services revenue grew 15% to $33.4 million, but this headline masks underlying weakness. Organic growth was negative in Q3 due to a $2 million client cancellation from unfavorable drug program outcomes, project delays, and slower bookings. The 30% gross margin reflects fixed consultant costs against variable project flow—when clients delay trials, SLP cannot quickly reduce headcount, causing margin compression. Management's guidance for 9-13% services decline in fiscal 2026 confirms this is not a temporary blip but a cyclical trough driven by biotech funding scarcity and pharma cost constraints.

The impairment charge is the financial embodiment of strategic miscalculation. The $77.2 million noncash write-down of Pro-ficiency and other acquisition-related intangibles signals that revenue synergies have not materialized. This matters because it forced the 10% workforce reduction and functional reorganization, which incurred $0.7 million in severance costs but should save $3-4 million annually. The implication is twofold: near-term earnings are depressed by acquisition failures, but the cleanup removes distractions and aligns cost structure with realistic revenue expectations.

Cash flow provides the strongest evidence of business quality. Operating cash flow was $18.1 million in fiscal 2025, up from $13.3 million in 2024, despite the services slowdown. Free cash flow of $17.4 million represents a 22% yield on the $79.2 million market cap, demonstrating that the core business generates cash even in a downturn.

With $32.4 million in cash and no debt, SLP has the liquidity to invest in AI development without diluting shareholders or taking on financial risk—a critical advantage over leveraged competitors.

Balance sheet strength also enables selective M&A. The $1 million investment in Nurocor, a clinical trial design platform, complements Pro-ficiency's training capabilities and extends SLP's footprint into trial execution. While small, this move signals management's continued belief that clinical operations represent a strategic adjacency worth pursuing, albeit with smaller, more targeted bets.

Outlook, Guidance, and Execution Risk

Management's fiscal 2026 guidance—revenue of $79-82 million (0-4% growth) and adjusted EBITDA margins of 26-30%—embeds cautious optimism. The software segment is projected to grow 5-9% organically, while services remain flat to down, reflecting persistent market headwinds. This indicates that management is not betting on a near-term biotech recovery; instead, they are optimizing for profitability in a constrained environment. The 26-30% EBITDA margin target, while below the long-term 35-40% goal, represents a 300-700 basis point improvement from fiscal 2025's depressed levels, driven by cost savings from the reorganization and higher software pricing.

The renewal rate narrative is central to execution. Q3 and Q4 saw renewal rates drop to the low-80s due to client consolidations—three to four impactful mergers reduced seat counts—and module configuration scrutiny. Management expects rates to recover to 90% as consolidations ease and AI-driven price increases take effect. Renewal rates are the leading indicator of software health; if they remain depressed, growth will slow and margin expansion will stall. If they recover, SLP can reaccelerate toward double-digit software growth and justify the AI investment.

Pricing power is the key lever. Management plans "more aggressive" increases tied to AI and cloud capabilities, monetizing through both premium modules and base platform integration. This is risky—clients under cost pressure may push back, leading to longer sales cycles or discounting. But if successful, it demonstrates that AI features create tangible value, supporting the thesis that SLP is evolving from a simulation tool vendor to an AI-enabled R&D platform.

Market stabilization assumptions underpin the guidance. Management notes "early signs" of biotech funding improvement and reduced tariff concerns for large pharma, but remains cautious: "I don't see others on the horizon of great significance, but consolidations are occurring." This hedged language signals that guidance is not aggressive; any actual stabilization could drive upside, while further deterioration would require additional cost cuts.

The long-term 35-40% EBITDA target depends on two factors: software mix increasing from 58% to 65-70% of revenue, and services margins expanding from 30% to 40% through higher utilization and pricing. The implication is that this is not achievable in fiscal 2026; it requires a biotech recovery and successful Pro-ficiency cross-selling. Investors must therefore view the current valuation as pricing in a multi-year turnaround, not immediate margin expansion.

Risks and Asymmetries: What Could Break the Thesis

Services cyclicality remains the primary risk. If biotech funding remains constrained and pharma continues delaying trials, services revenue could decline 15-20%, dragging total growth negative and compressing margins despite software strength. The $2 million cancellation in Q3 was unusual in magnitude but typical in cause—drug program failures. SLP cannot control client pipeline outcomes; a string of failures would create a "death by a thousand cuts" scenario for services.

Client concentration amplifies this risk. While not disclosed precisely, the impact of "three to four impactful consolidations" on renewal rates suggests the top 10-15 clients represent a meaningful share of software revenue. If a major GastroPlus or MonolixSuite customer merges and rationalizes seats, SLP could face 5-10% revenue headwinds with limited recourse. This is more acute than at Certara, which has broader enterprise relationships that cushion individual client losses.

Competitive pressure from Certara threatens pricing and market share. Certara's 34% EBITDA margins and $415 million revenue scale enable heavier R&D investment and global sales coverage. If Certara integrates AI more effectively into its Phoenix platform or undercuts SLP on price, SLP's renewal rate recovery could stall. The risk is asymmetric: SLP cannot match Certara's sales spend, so it must win on product innovation—a higher bar.

Pro-ficiency integration failure would cement the impairment as value destruction. If SLP cannot demonstrate cross-selling success or clinical ops traction by mid-fiscal 2026, investors will question management's M&A discipline and strategic vision. The $77.2 million write-down was a "prudent and conservative step," but a second failure would erode credibility and pressure the stock.

AI execution risk is subtle but material. If AI features like Assessments Plus or GastroPlus GPT fail to deliver accuracy or face regulatory skepticism, the pricing power narrative collapses. Management emphasizes "expert-driven guidance engineered to avoid hallucinations," but the FDA has not yet validated AI-generated modeling interpretations. A safety or efficacy issue traced to AI-assisted simulation could set back adoption industry-wide.

Macro headwinds persist. Patent cliffs, IRA pricing pressures, tariff threats, and NIH/FDA budget cuts create a "plethora of uncertainties" that make clients "cautious in their investment decisions." Even if SLP executes perfectly, a severe pharma downturn could overwhelm its defensive characteristics. The guidance assumes "stable operating environment with market conditions resembling those at the close of FY25"—a low bar that could still be missed if conditions deteriorate.

Valuation Context: Pricing in a Turnaround

At $18.43 per share, Simulations Plus trades at a $370 million market capitalization and $339 million enterprise value (net of cash). The valuation metrics reflect a company in transition:

• EV/Revenue: 4.3x on fiscal 2025 revenue of $79.2 million. This is below the 4.7-5.0x typical for niche healthcare software but above services-heavy peers. This implies that the market is pricing SLP as a mixed business, not a pure-play software company. If software grows to 65% of revenue and margins expand, a 6-7x multiple would be justified; if services continues declining, 3-4x is fair.

• Price/Free Cash Flow: 25.8x on $17.4 million FCF. This is reasonable for a company with 13% revenue growth and no debt, though not cheap. The yield of 3.9% is attractive relative to risk-free rates, providing downside support. If margins expand and FCF grows to $22-25 million in fiscal 2026, the multiple compresses to 15-18x, creating upside.

• Price/Operating Cash Flow: 20.4x on $18.1 million OCF. This is consistent with the FCF multiple and indicates minimal capex intensity (only $0.7 million in fiscal 2025). This highlights that SLP is a capital-light business that can convert revenue growth to cash efficiently—a hallmark of quality software companies.

• Gross Margin: 58.4% blended, but 79% for software and 30% for services. The blended figure is depressed by the services mix and acquisition amortization. If software grows faster and services margins improve, blended gross margin could reach 65-70%, supporting higher valuations.

• No debt and $32.4 million cash provide strategic optionality. The company can invest in AI R&D, make tuck-in acquisitions like Nurocor, or weather a prolonged downturn without dilution. This is a competitive advantage over leveraged peers and justifies a premium multiple.

• Negative profit margin (-81.7%) is misleading due to the $77.2 million impairment. Excluding this, net margin is approximately 15-18%, consistent with software peers. Investors should focus on cash flow and EBITDA margins (26-30% guidance) rather than GAAP earnings.

• Peer comparison: Certara trades at 3.5x EV/Revenue with 34% EBITDA margins, reflecting its scale and profitability. Schrödinger trades at 5.0x with negative margins due to R&D intensity. SLP's 4.3x multiple is fair given its smaller scale but higher software margin potential. The key differentiator is SLP's net cash position versus Certara's modest leverage and Schrödinger's cash burn.

The valuation embeds modest expectations. If SLP executes on AI pricing, stabilizes services, and grows software at 10-12%, fair value is likely $22-25 per share (5-6x EV/Revenue on $85-90 million revenue). If services continues declining and AI fails to drive pricing, fair value is $15-17 per share (3.5-4x EV/Revenue). The current price reflects a base case of slow growth with optionality on the turnaround.

Conclusion: A Software Core with Services Optionality

Simulations Plus is a tale of two businesses heading in opposite directions. The software segment, with its 79% gross margins and "critical infrastructure" status, provides a durable foundation that can weather pharma budget cuts and generate consistent cash flow. The services segment, while facing cyclical headwinds from biotech funding constraints and client cost pressures, offers operating leverage if and when market conditions stabilize. The $77.2 million impairment and 10% workforce reduction were painful but necessary steps to align cost structure with reality, while the AI integration across GastroPlus, ADMET Predictor, and MonolixSuite creates a credible path to pricing power and margin expansion.

The investment thesis hinges on three variables. First, can software renewal rates recover to 90% as consolidations ease and AI features justify higher prices? Second, will services revenue bottom out and begin growing again, or will it become a permanent drag on margins? Third, can management prove that the Pro-ficiency acquisition, despite its initial stumbles, eventually enables cross-selling into clinical operations and medical affairs budgets? The fiscal 2026 guidance suggests management is not counting on a quick recovery, which makes the 4.3x EV/Revenue valuation with zero debt a reasonable entry point for patient investors.

The stock's downside is cushioned by strong cash generation and a net cash balance sheet, while upside depends on execution of the AI strategy and stabilization of the services market. Unlike larger competitors with scale advantages, SLP must win through innovation and customer intimacy—a higher-risk, higher-reward proposition. For investors willing to tolerate near-term earnings volatility, SLP offers exposure to the secular growth of model-informed drug development at a valuation that does not require perfection. The software business alone justifies the current price; any success in services or AI monetization represents free optionality.