Cogstate
Q3 2021
By Manuel Maurício
April 30, 2021
Cogstate posted its third quarter numbers last week, and although there were no major news, an update is warranted:
During the quarter the company signed agreements with existing customers in addition to first time agreements with several new customers. Sweet!
The contracts signed during the third quarter reached $13 million, a record for Q3, leading to a record backlog of $56 Million in future contracted revenue.
This, in turn, will allow the company to reach profitability for the whole year (ending in July). I expect the company to remain profitable for the foreseeable future.
The company currently has $18 million in net cash, and it’s waiting to know if $2.4 million in US loans granted because of the pandemic will be forgiven by the US Government.
No one really knows what they’ll do with the cash. We can just wait and hope that they’ll spend it wisely. Maybe on an acquisition. Who knows?
Finally, a contract from ERT!
Also, the company has finally signed a contract through its partnership with ERT. This one is with a major pharmaceutical company for a global Phase II clinical trial of a treatment for autoimmune disease. Brad, the CEO, doesn’t disclose the value of the contract so I guess it’s a small one, but it goes to show that ERT is working on signing new contracts.
Brad goes on to mention that ERT has over 50% market share, with 120 salespeople, in comparison with Cogstate with only 3 salespeople. Cogstate’s technology is embedded in the ERT system so it should be easy to cross sell it to ERT’s customers. I expect this partnership to bear fruits for many years.
FDA review of Aducanumab will be in June
Eisai is committed to launching Cognigram in the USA within 1 year, the EU within 3 years, and China within 4 years. Brad mentioned that Eisai is engaging in substantial commercial activity in Japan and pre-launch activity in the USA. I should remind you that the Japanese contract won’t be bringing any profits for the foreseeable future as it was signed on a profit sharing basis and not on a revenue sharing basis as the global contract.
Not so good stuff!
On a different note, Brad O’Connor, the CEO, recently sold 2.25 million shares at a price of $0,9 per share to buy a house (!) Isn’t he aware that the share price can only go up?
I’m obviously kidding, but that was almost half of his stake in the company and it begs to question if he knows something that the rest of us don’t know.
Following that massive sale, the company issued a brand new share trading policy with the usual notes on how insiders shouldn’t trade the stock when they’re in possession of privileged information. I’m not sure what happened there, but it’s likely that the directors were surprised by the sale and wanted to send a signal.
New hires and share dilution
Back in December, the company hired a new Chief Financial Officer and a new Chief Technology Officer. It awarded them a “signing bonus” in the form of options to buy shares of the company at $1 per share, in order to align their interests with the rest of the shareholders. Of course, free options isn’t the same as shares bought with their own money, and at this stage, when the company is already profitable and has cash in the bank, dilution doesn’t please me.
On top of that, the vesting of the options is tied to easily attainable financial targets of $4 million and $7 million in operating profit in the next few years. I expect the company to achieve those numbers without great effort so I would’ve liked to see higher targets.
I’ve seen a fellow shareholder complaint about whether the Chief Financial Officer should the be getting stock options as compensation as he can bend the numbers in his favor. I had never thought about this, and it’s my belief that rewarding the CFO with stock options is common practice, but a point to bear in mind in the future.
CONCLUSION
The results were good, the company is heading in the right direction, there are some details that I don’t like which should be monitored, but overall the opportunity remains the same.
It’s quite hard to make estimates for Cogstate as we have very little information on how many clinical trials will be performed in future years, especially if the FDA rules negatively on Aducanumab.
The only analyst following Cogstate expects the company to post $45 million in revenue in 2023. I’m much more conservative and I estimate the company not reaching that figure until 2025 or 2026. This, coupled with an undemanding valuation of just 15x earnings, should lead to a great rate of return of 15% annually through 2025.
But apart from the estimates, what really matters is that Cogstate and its competitor Cambridge Cognition stand to benefit massively from the digitization of cognition tests as they’re the only two companies in the world that can attend the major pharmaceutical companies needs. Talk about a moat.
I like these med-tech companies. They’re completely uncorrelated with the economy and the barriers to entry are usually high. I’ll be looking at Cambridge Cognition soon. In the meantime, I couldn’t be happier with my position in Cogstate.
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