Cogstate
H1 2021
By Manuel Maurício
March 02, 2021
Cogstate’s results came out last week. Let’s check them out:
First of all, there’s been a change in the company’s revenue recognition policy regarding the Healthcare segment.
The company will now recognize all amounts related to the contracts with Eisai (Japan and Rest of the World) over the period of the contract instead of when the amount is paid. So… although the company has already received the $1M initial fee for Japan and the $15m initial fee for the Rest of the World (ROW), both of these amounts will be recognized over 10 years (for Japan) and 6 years (for ROW). This will originate a mismatch between revenue (and profits) and cash flow.
Having said that, the revenue from the clinical trials was up 52% in comparison to the first half of 2020. Remember, Cogstate’s fiscal year runs from July 1 until June 30.
When we look at it on a quarter over quarter basis, we see that there has been a slight decrease in revenue. Brad, the CEO, said that the decrease was due to the postponement of some clinical trials influenced by the pandemic. He expects that revenue to be recognized in the current quarter.
The costs have been a bit higher, but nothing out of the ordinary.
The revenue coming from the Healthcare segment was up due to the agreement with Eisai for the global distribution…
… but the profit from the segment has actually gone down due to one-time consulting fees related to that agreement.
Going forward, we should be seeing the profit from this segment match the revenue since all expenses will be borne by Eisai. That’s the beauty of a licensing agreement.
Some of the most important metrics to look at when looking at Cogstate are the amount of contracts that the company has signed in the past 12 months and the future backlog.
While the sales contracts have been a bit lower in the first half of the year…
The backlog (contracted future revenues) is at its highest level ever. This means that the demand for Cogstate’s technology in clinical trials is stronger than ever. On the other hand, it might be at its all time high because some revenue has been postponed.
By my calculation, the company should become profitable in the second half of 2021 and remain so thereafter.
BALANCE SHEET AND CAPITAL ALLOCATION
Following the capital raise from a couple of years ago and the two licensing agreements with Eisai, the company’s balance sheet has never been so strong.
Cogstate currently has $21M in cash and $2.9M in debt that is expected to be forgiven by the US Government.
When asked about the capital allocation policy and what the company will do with the cash they have in the bank, Brad replied that they are very focused on improving their mobile technology.
As far as I’ve been able to gather through various accounts of fellow investors, Cambridge Cognition is way ahead of Cogstate in mobile based testing. With the pandemic leading to increased demand for remote cognitive tests I wouldn’t be surprised if Cogstate was losing clients to Cambridge Cognition, but this is just speculation.
Will the efforts to improve the mobile tests require the whole $21 million? I don’t believe so. I would like the company to be more transparent on this subject.
ERT
Regarding the partnership with ERT, Brad has said that it has led to multiple sales leads and he’s expecting the first contract to be signed in the “coming weeks”. How big this contract will be, no one knows, but I expect the partnership with ERT to bear some interesting fruits in the coming years.
ADUCANUMAB
Just as a reminder, the FDA has until the 7th of June to make a decision on whether it’s approving Aducanumab or not. There are signs that the drug may get approval, but until the FDA comes out with its ruling, these are just rumors.
Biogen has also filed for approval in Europe and Japan. I’m not that familiar with the ins-and-outs of regulatory approval, but my guess is that the US decision will weight on those decisions as well.
CONCLUSION
Things are progressing well for Cogstate. Revenue is going up in the next couple of quarters, we’ll likely be seeing the benefits of the partnership with ERT in the near future, the company has a strong balance sheet, it’s about to become profitable, and there is a chance that the entire Alzeihmer’s Disease industry will change with a possible favorable ruling from the FDA.
Investors just have to sit tight and do nothing.
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