Description

Summary: Cogstate is based in Australia but all the numbers are in USD. Cogstate makes computerized cognition tests which are used mostly by pharma companies to do clinical trials for Alzheimer’s disease. They are the leader in the digital cognition tests which are the most accessible and easiest cognition tests. The business demonstrated operating leverage when EBIT margins increased to ~24% in fiscal 2022. Continued clinical trial volumes or approval of an Alzheimer’s drug can substantially increase demand for its tests. Downside is if the pharma companies decrease their effort to develop a drug for Alzheimer’s disease.

Business: Cogstate develops digital versions of cognitive tests which evaluate for cognition deterioration. Their tests replace paper and pencil tests administered by neuropsychologists. Cogstate’s tests can be done remotely so the subject and the psychologist do not need to meet physically. This trend of moving testing to home is helping Cogstate's tests. They use the term decentralized nature of testing in their reports. Cogstate’s tests are simple standardized test using images which can be administered globally with little variation because of different languages.

History: Cogstate’s scientists while working with Australian indigenous communities in 1999 discovered that cognition assessments were limited by language and cultural contexts. So they developed cognitive tests free of language and cultural contexts. Their product didn't make any money for several years in early 2000s. Primary Care Physicians felt no need to test cognition because there was no drug to treat it. Cogstate changed to help Alzheimer's drug discovery companies do clinical trials and they started making money. Now 90% of their revenues are from clinical trials for Alzheimer’s drugs. 

They make money by selling the tech and tests to pharma and biotech companies which use  the tests in clinical trials for Alzheimer's disease. The business helps with study, design and statistical analysis of the trial results. This business is like providing picks and shovels for clinical trials for Alzheimer's disease. Cogstate’s tests have been used in over a thousand academic studies and dozens of late-stage clinical trials. They are by far the largest and most validated computerized cognitive test in the world. Eli Lilly has likely invested the most money in Alzheimer’s research and uses Cogstate’s test for their Alzheimer’s trials. In addition to the clinical trials, they have tests like Cognigram which help in the detection of cognitive decline. This is DTC (Direct to consumer version) of their tests. They signed a licensing agreement with the Eisai which launched Cogstate's Technology preinstalled on smartphones in Japan. 

Customer Value: Cogstate holds a leadership position in digital testing. It takes 7-10 years for a test to be finalized, validated, supported by studies and then be ready for pharma companies to use. Hundreds of free tests are around but they are not validated. Big pharma companies are risk averse and would not want to use a test which has not been validated. Pharma companies can spend $500 mill + on clinical trials and would not want to save money on cognition testing which can potentially impair the validity of their trials. 

Competition: Cambridge Cognition offers validated tests, but Cogstate does not view them as direct competitors due to Cambridge's limited investment in related infrastructure, quality assurance, processes, and telehealth assessments by neuropsychologists. Cambridge's revenues amount to $14 million compared to Cogstate's $40+ million. In the United States, Signet Health (owned by private equity) and Metabolic Prophase (owned by WCG Group) provide services and infrastructure but rely on standard neuro-psych tests. Cogstate's tests are no better than these standard tests, which depend on doctors and lack ease of use and scalability. Cogstate's tests are available in 27 countries and 40 languages, used in 17% of clinical trials. Bill Gates, whose father passed away from Alzheimer's disease, has endorsed Cogstate's tests as accessible and easy-to-use diagnostic tools for Alzheimer's disease on his GatesNotes blog.

Lumpy revenues? Cogstate achieved record revenues of $45 million with an EBT of $10.7 million in fiscal year 2022, showcasing the operating leverage of their business. Revenue fluctuations are observed due to the timing of clinical trials, and delays have impacted expected revenues for 2023. However, the simplicity, digital nature, and cost-effectiveness of their tests have helped the company gain market share. Furthermore, the market for cognition testing is expanding.

Industry trends: More Alzheimer's disease drugs are in phase 3.  Eisai and Lily have phase 3 drugs. Cogstate bookings depend on the clinical trials done by pharma companies to develop a drug for Alzheimer's disease. 

Margins: The clinical trials business maintains a gross margin of approximately 60%, which is notably high compared to others in the industry. In software, margins reach the 90s, while services exhibit varying margins. Services such as project management and data management aim for around a 50% margin. The pandemic has led to a rise in remote assessments, including telehealth-style assessments within clinical trials. Cogstate has a global network of approximately 200 neuropsychologists who work as consultants, running their own clinical practices. With increasing growth, the profit before tax margin reached ~24% in 2022 and has the potential to rise to 30%.

Backlog of $140 mill. Company states that the timing of Alzheimer's disease trials are being impacted by trial readouts and regulatory decisions for Eli Lilly and Eisai in June 2023. 

Management announced A$13 mill share buyback and are repurchasing shares every week. Insidsers have also bought stock recently. Large shareholders include David Dolby (15% owner), whom Alzheimer’s Association International Conference gave its top philanthropic award in 2019. Martyn Myer (14% owner) awarded Officer of the Order of Australia for his contribution to medical research and establishment of Florey Neuroscience Institute. Eisai Co., one of the biggest pharma companies in Alzheimer’s research owns ~7% of Cogstate. 

Cash: It has ~$29 mill cash and no debt. In addition it has royalty cash flow stream from Eisai for the DTC version of their test which is $16 mill up front and low double digit % of royalty revenues. Minimum of $30 mill in such fees over ten years. 

Valuation: Cogstate is priced at 16x EBIT and 4x 2022 sales. Revenues are lumpy from clinical trials and fiscal 2023 revenues will be lower as company restructures to lower costs . However, their tests have barrier to entry and backlog at $140 mill, one of the highest ever, will continue to drive growth in 2024 and beyond. 

Cogstate is priced at EV/Backlog of 1x.

Risk: Alzheimer drug read outs are not promising or drugs fail and the clinical trial volumes decline. This happened once in 2017/2018.

Catalyst

Positive read outs of Alzheimer’s drugs clinical trials. Any drug approval will massively increase the need to test for Alzheimer’s in more testing and eventually into normal health care settings like a PCP office.