The main goal in biosimulation is to get an idea of how molecules such as drugs interact with cells, organs and the body as a whole. Drug development is not only complex, but it is also both capital and time intensive. The median cost of developing a new drug is now estimated to be around 1 to 2 billion dollars, with a timeline of going to market of around 10 to 15 years. Biosimulation software leverages mathematical models to predict how molecules behave in biological systems, resulting in lower costs for trials and getting to market faster. It does this by forecasting factors such as efficacy, toxicity and absorption for target molecules, allowing to screen for more candidates and to quickly arrive at the optimal dosage level. The alternative would be to arrive at these via expensive trials.
The chart below illustrates how large pharma R&D has been growing at a 7% rate. However, biotech is much more volatile, with booms and busts of R&D funding. According to Simulations Plus (SLP), the overall spend on drug development from large pharma and biotech combined would be around $200 billion per annum. Within that, biosimulation is a market of only $3 billion and is growing at an attractive annual rate of around 17%.
This is SLP’s CEO at the BoA conference in ‘21 discussing the challenges in drug development and how their software tools can improve outcomes:
“A number of 5,000 target drug molecules go into the development cycle for every 1 drug that is brought to market. The challenges are how does the drug work, is it safe, what's the right regimen, what is the biological effect and what are the risks or toxicity? Our products and services are focused on answering those questions, reducing the trial-and-error nature of the historical process. Modeling and simulation is a means by which you can get to an efficacy, safety and regulatory approval more efficiently.
We deliver very accurate drug and biological models to our clients, in the analysis from early discovery through to regulatory approval. We have a portfolio of software products, all of which are recognized as leading tools for model-informed and data-driven drug development. And we have a consulting practice that supports our clients from basic outsourcing needs to addressing more tricky issues in terms of simulation techniques.
Having started in the early days of adoption 25 years ago, we now have 250 clients and a high retention. Modeling and simulation is a combination of skill sets that runs the gamut from physics, chemistry, statistics and pharmacology. The number of scientists in this space that could run the engine and use the software was relatively low in the early days, it was a unique skill set but today, there's more than a dozen PhD programs in computational biology out there.
Scientific acceptance in the regulatory environment has been another factor. Over time, the FDA and their equivalents around the world began to utilize simulation internally in their evaluation of drug submissions. That built up to a FDA that today issues guidelines to the industry in support of modeling. When COVID hit, one of the first FDA guidelines to the industry was how modeling and simulation could be used to still maintain the value of clinical trials that were disrupted.
When the FDA issues for example a bioequivalence waiver, basically it waives the requirement to go into the clinic and perform a clinical trial to prove an efficacy or toxicity issue. That can be based on data and analytics brought to them through simulation. Obviously, the time and the cost of the clinical trial can be high, but the real big impact is getting that drug to market 6 months or a year earlier. Initiating the revenue stream for a drug can be quite dramatic for our clients.”
At the recent capital markets day, the company disclosed that the number of clients had risen to 400. Around 40% of SLP’s revenue mix stems from services which usually I’m less interested in as barriers to compete tend to be lower here. However, as these services are mostly helping clients with modelling and simulation in SLP’s tools, it’s really tied to the software business and there probably aren’t many competitors around which will have this know-how.
The number of scientific publications making use of biosimulation has been accelerating over the covid years:
SLP mentioned that over 1,300 publications cite their products and services contributions, so comparing these numbers to the data above would give them a market share of 16% in the overall space. Later on we’ll dive deeper into the competitive landscape.
Also the FDA has been expanding guidance on where biosimulation tools can be incorporated:
Another new driver for adoption is a regulatory push to reduce testing of chemicals on animals, from the recent capital markets day:
“About 10% of our customer base today is in the non-pharmaceutical space, chemicals, cosmetics and consumer goods companies that have already been told by regulators around the world, especially Europe, that they need to greatly reduce or completely eliminate animal testing on some products. With the offerings that we have, you can start predicting without any animal data and with reasonable accuracy, what the absorption and exposure of chemicals systemically would be.”
Similar to the industrial CAD and simulation software markets, the biosimulation market utilizes a series of software tools specialized for each task. Gradually tools are now being integrated into software platforms, although the focus is also still on building out these tools with more advanced methodologies so that they can be cross-sold to clients. These then create a workflow from this series of tools. SLP’s CEO discussing this topic:
“We have several large entities that utilize the full suite of products and services but there are gaps. The industry itself is a very siloed process, with discovery and clinical departments. Modeling and simulation developed in its early days to provide solutions to these various departments in a sort of point effort. As modeling has become more strategic for our clients, they look more broadly at its use from start to finish. And that's been a focus on our part to develop a suite of platforms that can support the full scope of modeling needs. We’re very focused in terms of making these tools easier to use and more efficient, and that brings new companies into the fold as well.”
A number of these tools have been added to the portfolio by acquisition. This is SLP’s CEO discussing their M&A strategy:
“The strategy is broad and covers both the software as well as the service space, albeit our focus leans in the direction of the software side. This is evidenced by 2 of the 3 acquisitions to date having been software oriented and I would anticipate that to be the case going forward. Our focus on the software side is both in terms of expanding functionality that could be integrated into our existing platforms as well as acquiring other stand-alone solutions that address needs between what we provide today. There is a good population of companies out there, small privately funded entities that have developed solutions that would be great additions. We've been pretty strict in terms of our criteria for acquisitions, looking for product and culture fit, but also focusing on accretive acquisitions at a good valuation point.”
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Simulations Plus’ software and services portfolio
How biotech should be moving into a new upcycle
A detailed analysis of the financials and valuation of the company