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Instem's increasingly SaaSy profile should improve revenue visibility and enhance margins

Since its trading update on January 16, the stock has risen from 143p to 227p, a gain of almost 59%
Medical scientist
The transition to SaaS across the regulatory life sciences industry has been quickening in recent months

Instem Plc (LON:INS), a leading provider of information technology (IT) solutions to life sciences firms, has been one of the better performers in 2018.

Since its trading update on January 16, the stock has from 143p to 227p, a gain of almost 59%.

The trading update included news of a big contract from a top-five global non-clinical contract research organisation.

It’s a two-year SEND (Standard for the Exchange of Nonclinical Data) outsourced services contract worth £1.7mln.

To put that into context, Instem’s revenues in the first half of 2017 totalled £10.3mln, up 13% year-on-year.

FDA issues a new directive on SEND

The US Food and Drug Administration (FDA) announced in December 2017 that the next major milestone in its adoption of the SEND was now in force, mandating that earlier stage drug approval submissions would fall under the requirement to include SEND data packages.

SEND ensures that each company presents its data in a consistent format, which is what Instem helps them to do.

"For several years, we have been presenting an anticipated substantial 2018 uplift in SEND study volume following the December 2017 FDA mandate, which is now materialising,” said Instem’s chief executive officer, Phil Reason.

“With SEND data sets now on the critical path in the new drug development timeline, the industry will only work with partners that can quickly deliver to an exceptionally high quality, which puts Instem's people and technology in very high demand. This new CRO award, combined with commitments to other clients, means we are already contracted to deliver in 2018 over five times the number of SEND assignments completed in 2017," he added.

"Winning what we believe to be the largest outsourced SEND services contract ever awarded is clearly a huge endorsement of Instem and our SEND credentials,” Reason asserted.

After a disappointing first half of 2017, things picked up

Full-year results from Instem are due to come out towards the end of this month (March) but the company has tipped the wink to the market saying the results are expected to be in line with market expectations.

Instem successfully delivered around £0.75mln of cost savings anticipated in its mid-2017 restructuring and ended the year with net cash of around £3.1mln.

All areas of the business made a positive contribution to the full-year financial performance, with many new client wins, as well as existing customers extending their use of Instem's products and services, the company said.

"After slower than anticipated growth in H1 2017 the second half of 2017 has been much stronger. Revenue increases and expense reductions have delivered a strong increase in full-year profit and the sales order pipeline has once again strengthened,” Reason said, adding that the current period has started well.

In pursuit of recurring revenues

Like most IT firms these days, Instem is targeting annually recurring revenue and higher margins, with less reliance on perpetual software license sales.

The growing shift towards a revenue model based on software-as-a-service (SaaS) will see a continued improvement of earnings visibility for Instem and will ultimately deliver an expansion in operating margins in-line with similar cloud-based delivery models, the company told investors in early March, as it revealed that one of the world's largest chemical products companies was the latest customer to sign up to access solutions via the Instem Cloud. 

Instem's online platforms are run from centralised state-of-the-art third-party data centres, which can be accessed from any location, offering connectivity to the internet, 24/7.

The company indicated that the switch by this client to the Instem Cloud would lead to a 40% increase in recurring revenue from this one client.

In the first half of 2017, Instem disclosed that recurring revenues increased 23% to £6.5mln from £5.3mln the year before, of which SaaS revenues accounted for £1.7mln, up from £1.2mln in the first half of 2016.

The proportion of recurring revenue to total revenue in the period increased to 63% from 58% the year before, and clearly there is scope to ramp this up some more.

"The strategic process of migrating clients from on-site installations to our market-leading SaaS model continues apace. This latest agreement with a leading chemical client sees Instem deploy its Provantis product from its own secure cloud services environment, as opposed to the client's own data centre, thereby reducing their cost of ownership while improving Instem's software deployment and management efficiencies," Reason said.

"The transition to SaaS across the regulatory life sciences industry has been quickening in recent months after initial concerns over data security and the generally conservative nature of the participants; however, both existing clients and new prospects are now fully recognising Instem's leadership in this area and with GDPR [general data protection regulation] coming into effect in May of this year we anticipate strong growth in SaaS revenue," he added.

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