Cogstate
FY 2021
By Manuel Maurício
September 02, 2021
Back in June 17, the US Food and Drug Administration approved the commercialization of Aduhelm (Aducanumab), the first drug for the treatment of Alzheimer Disease in over 20 years.
I was ecstatic on that day.
I commented it on the Subscribers Facebook Group, but given the huge importance to Cogstate, I should’ve written a post here instead.
Before we proceed to talk about how that is impacting the industry and Cogstate, let’s take a look at the most important metrics.
On my March write-up I noted the slight decrease in revenue for the first half of 2021. At that time, the CEO said that the revenue should be recognized in the second half of the year.
And indeed it was. In the second half of 2021 the company recorded an all time high revenue of $18.8 million.
As expected, the costs to achieve this record revenue have hardly moved.
The operating leverage is high, meaning that the company won’t need to increase costs in proportion to the revenue.
Now, I do expect the costs to rise in the future, but not nearly as much as the revenue.
In fact, Brad (CEO) addressed the issue during the last Conference Call by stating that in 2022 (which, for Cogstate started on the 1st of July of 2021) the gross margin for the Clinical Trials won’t be as high as in the last quarter of 2021 (58%) because they want to ensure that they have “the technical infrastructure and the operating processes that support a much larger business.“
Even while he expects to deliver strong growth and strong margins in 2022, he expects the investments to translate into higher margins in 2023, 2024, 2025.
HEALTHCARE SEGMENT
On my previous estimates, I thought that the Healthcare segment would be pure margin because the Eisai global deal states that Eisai will bear all the costs related to both development and commercialization.
But it appears I was wrong. There have been some costs under this segment.
I’m still trying to talk to management about this subject and others.
I’m not sure if these costs are related to the Japan deal where Cogstate will only be sharing the profit (not the revenue) or if it’s related to managing the relationship with Eisai or what.
Anyways, the company estimates these to be around $1.5m in FY22, roughly double what it was in 2021. This, together with the higher revenue to be recognized under the global agreement, will take the profits for the segment to double in the coming year.
Not only that, but the approval of Aduhelm has unlocked the second part of the global deal with Eisai taking the guaranteed minimum royalty stream from $10 million for the next 5 years to $30 million for the next 15 years.
SALES CONTRACTS AND BACKLOG
With the recent announcement of a HUGE Phase 3 trial contract worth $32 million, in the past twelve months the company has signed deals that amount to $60 million for Clinical Trials alone…
…leading to a record backlog of $94 million.
This backlog gives the company great visibility into the future revenue.
In the chart below, we can see how the backlog will be recognized as revenue in future periods.
Bear in mind that the chart was produced before the announcement of the $32 million contract. With $6 million more of those $32M being recognized in 2022, the company expects to, at least, generate around $31 million of revenue in 2022 just from the clinical trials segment. I expect it to be much higher.
THE BROAD PERSPECTIVE
The approval of Aduhelm came to revolutionize the industry. If you listen to Brad on the Conference Calls, he rarely says much, and he never seems too enthusiastic about the future, but you can infer from his words that the industry (and Cogstate) is on fire.
Not only that, but the FDA granted “breakthrough therapy” designation for two other new potential treatments for Alzheimer’s Disease (Donanemab and Lenanemab).
This is already leading to a strong increase in investment in the space.
“History has shown that approvals of the first drug in a new category reduce perceived R&D risk, resulting in increased investment while also encouraging innovation.”
Take Multiple Sclerosis as an example. The approval of the first biologic drug in 1993 originated a long line of investments in the area.
Brad also said that he’s seeing even small biotech companies, who had nothing to do with Alzheimer’s Disease, now getting funding and entering the space.
CLINICAL TRIALS ARE GOING REMOTE, BABY!
Not only there’s a strong incentive to pursue the Beta Amyloid hypothesis now that the FDA has granted approval to Aduhelm, but it looks like the pandemic had a beneficial side-effect for Cogstate.
With social distancing preventing everyone from getting together, many clinical trials had to go remote. In fact, the $32 monster contract that I’ve mentioned will be fully remote. Many more of the contracts that Cogstate is negotiating right now will be remote, or at least they’ll have a backup plan to go remote if needed.
So, even if there was no increased investment in Clinical Trials, we would be seeing Cogstate benefiting from the shift to remote assessments.
HEALTHCARE SEGMENT WILL BENEFIT
As I have had the chance to explain in prior occasions, the approval of Aduhelm will boost the healthcare segment as people will need to be diagnosed and monitored.
Cogstate has signed a deal with Eisai (co-developer of Aduhelm with Biogen) for global distribution. Eisai has been on a hiring spree for salesmen to visit every doctor and nurse in the USA to introduce Cognigram, Cogstate’s remote assessment product.
Here’s a quote from one of their job ads:
“The Alzheimer’s Market Development Professional (MDP) is responsible for educating the non-prescribing primary care physicians (PCPs) and their staff on the screening, identification, diagnosis, and referral of appropriate patients to AD specialists.”
With Cognigram coming to the US market in the coming months, I don’t expect we’ll see much upside from the annual minimum royalties ($4.5M per year) in 2022, but we should be seeing higher contributions in the following years.
The opportunity here is massive. Let me remind you that after the US, Eisai will introduce the product in Europe (2 years from now) and then in China (3 years from now).
Unfortunately for humanity, the number of people suffering from some type of dementia is staggering. And estimates are that those numbers will only go up.
But it won’t be just the people with dementia that will be using Cognigram. In fact, because Aduhlem is to be administered to patients at an early stage of dementia, every person above 65 years old is a potential candidate for using Cognigram.
ESTIMATES AND CONCLUSION
Just yesterday, I was talking to a new subscriber and he told me that he liked Cogstate, but he felt that he had missed the train.
We all have this anchoring bias. Whenever wee see a stock go up 2, 3 or 10 times we tend to think that the best time to invest was 1, 2 or 10 years ago.
But we can rarely invest before everyone else spots the opportunity. The legendary fund manager Peter Lynch is famous for saying that you don’t have to invest in the first inning (baseball analogy). You can invest in the second or third innings.
Having said that, and while I have invested in Cogstate when it was trading for half the price, I believe that the opportunity today is even bigger than when I first invested in it. Let me rephrase that.
It’s not that the opportunity is bigger, but with the global deal with Eisai and the approval of Aduhelm, the range of future outcomes has narrowed a lot whereas the risk got much lower.
This subscriber also told me that he would like to see some kind of “price target” for each of the companies in the Portfolio. He’s not the first to mention this.
I understand where he’s coming from. He wants to know the potential upside for the different stocks in the Portfolio so he can then research the ones with the highest potential and make a decision.
PUTTING A PRICE TARGET ON A STOCK
I’m tinkering with that idea as I believe it to be in the best interest of my subscribers, but I’m reluctant to put price targets on stocks.
Let me explain by using Cogstate as an example.
Cogstate is Eli Lilly’s designated technology partner for Alzheimer’s Disease clinical trials. Eli Lilly is also developing a very promising Alzheimer’s Disease drug called Donanemab.
Once the drug gets approval, Lilly will likely want to use some type of electronic screening and monitoring technology. The only two real alternatives are Cognigram by Cogstate and CANTAB by Cambridge Cognition. If Lily goes with Cognigram, it would represent a massive boost for Cogstate as it would mean world domination.
But who can predict that? And how do you put a price tag on that? You don’t. No one even knows what revenue Cogstate will be making from the already existing Eisai deal.
As I told this subscriber, when I invest in a company I want to be directionally correct. What I want to know is if there’s a strong chance that the company will be earning more in 5 years from now, and if it’s considerably cheaper than what it could be expected by the end of those 5 years.
I believe Cogstate will be earning a lot more 5 years down the road, and we will likely be seeing it trading at multiples of its current price.
Having said all of this, I’ll be updating my Excel model when I get a reply from the management regarding the Healthcare costs, and I’ll then update you on the potential upside that I estimate for the stock.
In the meantime, I could hardly be more excited about Cogstate’s future.
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