Simulations Plus Acquires Lixoft For European Growth (NASDAQ:SLP)

Quick Take

Simulations Plus (SLP) has announced the acquisition of Lixoft for up to $16.5 million.

Lixoft has developed drug development simulation modeling software.

With the deal, SLP gains additional modeling capabilities and a stronger European geographic presence.

SLP has performed well as a stock in the volatile markets, but I view it as priced for perfection and my opinion is Neutral at its current level.

Target Company

Paris, France-based Lixoft was founded to develop a suite of software tools that enable biopharma research firms and others to perform PKPD (PharmacoKinetic / PharmacoDynamic) modeling functionalities.

Management is headed by co-founder and Chairman Jerome Kalifa, who was previously Head of Healthcare Division at Dreem and General Site Manager at Zoran.

Below is an overview video of using the firm’s suite to create a population PK model:

Source: Lixoft

Lixoft’s primary offerings include:

  • Datxplore

  • PKanalix

  • MIxplore

  • Monolix

  • Simulx

Market & Competition

According to a 2018 market research report by Grand View Research, the market for biosimulation software was $1.2 billion in 2016.

This represents a forecast CAGR (Compound Annual Growth Rate) of 15.4% from 2018 to 2024.

The main drivers for this expected growth are an increasing demand for modeling drug resistance in major diseases as well as continued innovation in the use of machine learning and semantic technologies.The global biosimulation market in 2015, divided by market share, is shown below:

Major vendors that provide competitive services include:

  • Dassault Systemes (OTCPK:DASTY)

  • Certara

  • Advanced Chemistry Development

  • Schrodinger (SDGR)

  • Genedata AG

  • Rhenovia

Source: Research Report

Acquisition Terms & Financials

SLP disclosed the acquisition price and terms as $11 million in cash and up to an additional $5.5 million in earnout potential over the next two years.

Management provided the following financial guidance as a result of the transaction:

We expect this deal to contribute to our pretax cash flow going forward and be immediately accretive to earnings. It will not affect our ability to continue to distribute dividends…

A review of the firm’s most recently published financial results indicate that as of November 30, 2019 SLP had $12.6 million in cash and equivalents and $8.6 million in total liabilities, with no long-term debt.

Free cash flow for the twelve months ended November 30, 2019 was $11.5 million.

In the past 12 months, SLP’s stock price has risen 67.5% vs. the U.S. Healthcare Services industry’s rise of 14.0% and the U.S. overall market index’ fall of 15.9%, as the SLP chart indicates below:

Source: Simply Wall St.

Earnings surprises versus analyst consensus estimates have been positive in ten of the last twelve quarters, as the chart shows here:

Source: Seeking Alpha

Valuation Metrics

Below is a table of relevant capitalization and valuation figures for the company:

Measure

Amount

Market Capitalization

$597,930,000

Enterprise Value

$586,090,000

Price / Sales

16.59

Enterprise Value / Sales

16.35

Enterprise Value / EBITDA

47.33

Free Cash Flow [TTM]

$6,440,000

Revenue Growth Rate

18.92%

Earnings Per Share

$0.50

Source: Company Financials

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming the above generous DCF parameters, the firm’s shares would be valued at approximately $13.32 versus the current price of $34.25, indicating they are potentially currently overvalued, with the given earnings, growth and discount rate assumptions of the DCF.

Commentary

SLP acquired Lixoft to add its modeling software and geographic presence in Europe.

As SLP CEO Shawn O’Connor stated in the deal announcement,

It represents an additional complementary software product to our existing offerings and provides for an attractive expansion of our range of consulting services. Finally, it provides us increased presence in the European geographic area with experienced executive management.

Biomodeling software for the purposes of drug development is a quickly growing industry, expected to grow at a CAGR of more than 15% in the several years ahead, so the deal for Lixoft’s capabilities and European coverage makes strategic sense.

On a revenue multiple basis, SLP paid a Price/Sales multiple of 4.7x, a reasonable multiple for the deal.

As to SLP’s stock, that’s a tougher one to justify. My DCF assumptions, which are generous, indicate the stock is overpriced.

Also, a basket of publicly held firms in the Healthcare Information and Technology category aggregated by the NYU Stern School indicated an average EV / Sales multiple of 5.41x in January 2020 versus SLPs current value of 16.9x.

In a post-coronavirus world, can SLP justify its stock price and go higher or is it priced for perfection?

I’m bullish on the healthcare and biopharma industries over the medium term as the world places greater emphasis on improving its healthcare systems which have been shown to be inadequate in many respects.

SLP stock has performed admirably in the context of the overall market selloff from the Covid-19 coronavirus pandemic.

However, while investors cheered its most recent quarterly results, I view the stock as priced for perfection from multiple valuation approaches, so my bias on it at its current level and financial assumptions is Neutral.

I research IPOs and technology M&A deals.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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