Seems to be good news. Hopefully this will lead to further studies and eventually turbocharge general healthcare use of Cogstate (the latter not being my central thesis).

[Held]

Am expecting a flogging at the open for Cogstate today. Alot to absorb in those announcements. My initial thoughts coalesced around four major areas:

• The company has attracted takeover interest. That's probably the least revelatory part of this given the current M&A environment but worth filing away at the back of my mind. [NEUTRAL]
• It's a leaky old ship. The ASX should be looking at who was dumping stock prior to the trading halt and what contact they had with the company in the past week. It reflects poorly on Cogstate too. [BAD]
• Tough year. The revised guidance changes since November are big. It represents a significant reversal of fortune for the company relative to recent years. The question is whether it's a blip or not. There's probably two points in here, with the other being around management competence in regards to forecasting and messaging but I'll squish them into one. [BAD]
• Contracted revenue is up. They didn't exactly trumpet it but future contracted revenue is up from $139m as at the end of FY22 to $146.7m today. It's the key metric I look at so it's a significant mitigant against all the other news. It would of been nice to see how that is phased but I guess we'll see that on Tuesday. [GOOD]

Overall I think they're right to get a decent whack today. The market has a resting angry face at the moment and is looking for any chance to sell aggressively. But it's worth considering whether it's a permanent or temporary change.

[HELD]

Although Cogstate's quarterly update looked a little underwhelming at first glance, that's mainly the result of cycling a monster quarter (by far the largest in their history) from a year ago. Read a little more into the result and it's actually really strong.

Future contracted revenue is at a record high of US$148.3m after adding a net US$17.9m in the most recent quarter. That is one of the highest net additions in their history. It also meant they went back to filling the top of the sales funnel at a faster rate than it was recognised as income. That is one of the key things I look to with Cogstate to continue to give me confidence they will continue to grow over the longer term.

In terms of short-term performance FY23 is likely to be a slightly muted year. The revenue backlog for FY23 grew from US$33.9m at 30 Jun to US$36.8m as at 30 Sep (including 1Q actuals). They are yet to give guidance but will do so at the AGM. In prior years Cogstate has gotten between 35% and 51% of its revenue from in-year signings. That would point to a full year result of US$52-69m. However, they also stated they expected the contribution from in-year signings to reduce. Overall I think the lower end of that range to be challenging and small beat of the FY22 result of US$45m is probably more realistic. However, FY24 and FY25 continue to look really positive.

They also highlighted the Eisai Lecanemab results that were released last month and have been extensively discussed. Topline results from Roche's Gantenerumab and Lilly's Donanemab are due this quarter and mid 2023 respectively.

Cogstate's AGM is being held on Friday 4 November at 11am, where they will also provide full year guidance.

[Held]

Cogstate reported today with record revenue (up 38% YoY), record profit (up 84%), record clinical sales contracts executed (up 74%) and a record order book (up 37%) at $139.1m. Looking backwards, forwards, up and down it looked pretty good. The share market rewarded them with a trimming of the share price of almost 10% at one point. So what's going on? Let's take a look.

What the market really didn't like was the outlook for FY23. Management highlighted on the call that a number of clinical trials are being delayed at present and are playing clarification tennis with the FDA. So while the record order book is great, it's being skewed more to the right of screen more than is typically the case. As a result management have guided clinical trials in 1H FY23 to be at a similar level to the half just ended. Although they hope some of the FY24 contracted revenue may be brought forward into 2H FY24, hope is not strategy and they aren't providing a full year outlook. Healthcare's contribution for the full year is expected to be similar to FY22, which is not surprising given how much of it is derived from Eisai royalties at this time.

The good news is that FY24 and FY25 look absolutely bumper at the moment. Per the graph below (bottom left) the revenue backlog in FY24 is already almost that of FY23 and FY25 isn't too far behind.

The other thing that stood out on the call was the mix of Cogstate's share of Alzheimer's trial market between phase of trial. Cogstate has grown their overall share of this market to 17% but even better is the fact that their market share in phase 1&2 is much higher than phase 3. So if some of those early trials get good reads and roll into much larger phase 3 trials it bodes well for Cogstate.

The company is eagerly awaiting imminent reads from three phase 3 Alzheimer's trials and has highlighted that a positive outcome for any of these would have a positive impact on both the Trials business and the Healthcare business.

Like anyone I'd love to own a company that grew 30% year on year like clockwork through all cycles and conditions. But it's just not realistic - it's not how the world works. For me likely softness in FY23 (flatish versus FY22) doesn't reflect on the company or management's execution and I will continue to hold.

My thoughts following the release of the Cogstate quarterly update and investor call:

-         Financial results were basically within guidance

-         One exception was operating cash which was strong at US$9.2m, versus guidance of $5m+

-         The one knock on the update was slowing sales in the quarter. For the first time since I’ve been watching them they didn’t fill the top of the sales funnel as quickly as revenue flowed out the bottom. Brad acknowledged that but said there was “no trend to talk to” and “expect to see a stronger Sep qtr”. Of the $8.8m sales in the qtr, approximately half should be recognised in FY23

-         Alzheimers clinical trials are becoming an ever greater proportion of trial sales (84.2% in FY22 versus 65.3% in FY21)

-         Seeing some delays in trials, which they attributed to delays in drug manufacture and recruitment of cohorts). They confirmed in Q&A that postponed trials delays not only revenue recognition but also cashflow as contract schedules are linked to milestones rather than dates.

-         Noted near term readouts of phase III trials for Eisai and Roche (both CY22) and Lilly (mid 2023)

-         Healthcare deal with Eisai will benefit from a successful phase III trial

-         Noted that clinical trials are increasingly adding decentralised elements, which Cogstate are well positioned to support. Decentralised trials are cheaper overall but they believe Cogstate will get a larger proportion of the trial budget.

-         When asked about margins they stated they were optimised for the current revenue base but should see further operating leverage on higher revenues. Also said a successful phase III trial would be beneficial for this as it would result in higher Healthcare revenue, which lends itself to more of a pure software sale rather than Clinical Trials, which are a mix of software and services.

-         Proposed use of free cash flow – looking at acquisitions but they would need to be complementary to existing business and not add significantly to cost base. Otherwise there may be an opportunity to return some to shareholders.

-         They didn’t mention the recent discussions throwing doubt on amyloid research published back in 2006 that Nnyck777 mentioned a few days ago (I did ask but they didn’t take that question).

Overall, I think it's a strong result showing that they are growing, are delivering operational leverage as they grow and some near term catalysts that would be very positive should they occur. The one thing that gives slight pause is the slowdown in contracted sales and I'll be watching the next quarterly closely to ensure it's a blip and not a trend.

[Held]

Cogstate provided an update today, which re-iterated current year guidance but showed a significant increase in contracted revenue to be recognised in coming years.

It takes a little bit to get your head around this company, in particular the sizable moat that I argue it has and also how it's contracted revenue gets recognised over multiple years. However, once you do I think you find a really interesting company with some bright future prospects. I would say that it doesn't scream 'bargain' at me right now and it is quite volatile so you can afford to be picky with your entry.

The following slide is one I hadn't seen before and gives some more transparency about the lag between contracted revenue and revenue recognition:

If you are new to this one there's loads of posts about this on the company page. I'd also recommend the discussion Matt Joass had with the Overlord on the Meetings tab and also the Baby Giants podcast which covered it.

[Held]

Matt Joass has certainly kicked off a lot of interest in Cogstate, although it had its fans prior to this as well and congratulations to all of them.  I note the talk of competitors and management acknowledge (when prompted) that it's not rocket surgery and that some of their biggest competitors are free online tests.  What management know, however, is this talk of competition is a bit of a furphy.  

It reminds me of the debate between VHS and Beta.  History lesson for younger members - back in the olden days we used to store movies in big plastic bricks and we'd store those bricks on the shelf next to actual books (like you see in the library - I know, story for another day).  When we wanted to watch that movie we'd take the brick off the shelf and insert it into a slot in a metal box.  Then through a complicated process of magic* the movie would appear on a television.  At the end of the movie you'd sometimes get your brick back and sometimes the box would eat it - it was a roughly 50/50 proposition.  Anyway, in the mid 1970's VHS and Betamax had competing bricks and boxes.  Betamax offered better sound, better resolution and a more stable image.  VHS offered...better marketing.  VHS won.

How does this relate to Cogstate?  The point it isn't always about who has the better product.  In this case it's about the almost 2000 clinical trials using Cogstate products.  If I'm a researcher designing a trial for a new treatment, formulation, cohort or dosage etc. and I've got enough funding I'm going to use Cogstate every time.  My motivation is to keep as many of the other variables as constant as possible.  It's a no-brainer.  It doesn't matter if I think there's a cheaper product out there with more powerful magic*, I want to limit as many opportunities to introduce extraneous variables as I can.  Importantly Cogstate doesn't need to compete on price in this setting.

What's a little less certain for me is how effectively that moat applies when trying to rollout to a general healthcare setting.  In a more regulated environment where private and universal health insurers are offering rebates I can see how this might work but it's a little less certain and I think price sensitivity is greater here.  It's a potential huge market though.

***

* There may of been some science in it too.