I really enjoyed today's chat with Cogstate's Brad O'Connor (not Cooper!! as I mistakenly said.. ugh)

The recording in on the Meetings page and the transcript is here: Cogstate Transcript.pdf

A couple of things that stood out to me:

• I REALLY liked the assertion that they are staying focused on their core competency -- a narrow but deep moat, as Brad put it. Doing too much, too soon is just too often a capital killing move for small caps.
• It's clear that their offering is gaining increasing awareness and adoption by the big firms. As i say all the time, the social proof element is super critical for disruptors to properly exploit the opportunity in front of them.
• It was really interesting to hear him say that the R&D phase is actually still critical, if even dominant relative to the challenge of scaling (not that they are ignoring that at all). His reference to AI here seemed grounded and reasonable, and the partnerships being leveraged here made a lot of sense.
• Brad essentially spelled out what we investors should focus on -- the lead indicator of contract wins. Which, i suppose, it's somewhat obvious, but reading between the lines I wonder if he was essentially saying "we're expecting to win a bunch of work in the coming period"
• I thought his comments on takeovers, the company's initial listing and their increased IR efforts were all rather candid and reasonable. Most often you get more generic responses to those kinds of questions.
• The developing operating leverage is hard to miss, and testament to how well they are scaling. In fact, it is remarkable that their revenue has grown to the degree it has while they actually cut staff -- and significantly so.
• This wasnt discussed, but a PE of 37 actually doesnt seem too excessive at all *if* they can indeed double their revenues in the coming years and sustain (or even extend) their margins.

Also, big shout out to @mushroompanda who's question Brad called "remarkably insightful". Looks like you've got a job offer out that one too!

Anyway, here's the AI summary of the meeting:

• What Cogstate does (problem → solution)
• Core problem in CNS trials: highly subjective clinician-administered cognitive endpoints at global scale create noise that can mask drug signal. Cogstate’s mission is signal over noise.
• Solutions span: validated digital cognitive tests, trial design expertise, investigator training/certification, algorithmic data monitoring, human review of recorded assessments, and robust stats/reporting—all to reduce error.
• Economics of “getting endpoints right”
• A single Phase 3 Alzheimer’s trial can cost ~US$1B; Cogstate’s endpoint quality services are ~US$30–40m, a small fraction of total but critical to success and regulatory acceptance.
• AI & the next phase of clinical trials
• Trials are changing fast (1–3 years, conservatively “3–5”). Cogstate is applying small, purpose-built models over proprietary data rather than relying on generic LLMs.
• New AI model (shipping “next month”) flags assessment-administration errors from audio recordings, moving human review from ~60 minutes to ~10 minutes—and ultimately to full automation and 100% review coverage. North Star: real-time prevention and, longer-term, AI avatar administration (multilingual, consistent, error-free).
• Efficiency evidence: headcount down from ~200 to ~160 since COVID while revenue climbed from ~US$30m to ~US$50m, due to automation and data-analytics leverage.
• Build vs partner (tech strategy)
• Two years ago Cogstate shifted from fully in-house dev to a hybrid model with global engineering partner UST (~30k engineers). They run 12-week innovation cycles, tapping UST’s AI/data leaders, while Cogstate focuses on proprietary datasets and domain problems. Deliverables include avatar patients/caregivers for training/certification and internal productivity tools (e.g., AI-drafted RFI/RFP responses).
• Medidata partnership (scale unlock)
• Medidata is the dominant eClinical/EDC platform (acquired by Dassault Systèmes in 2019, ~US$5B deal). Historically light in CNS due to service intensity needed. Cogstate wraps CNS services around Medidata’s platform so Medidata can push into CNS; Cogstate gains reach and scale. Expect impact to show more in FY26 than FY25. Shareholder day (Nov 7, Melbourne) will feature Medidata’s COO Joe Schmidt and an ex-Lilly exec to discuss the partnership.
• Financial profile & capital allocation (as discussed)
• Recent year revenue ~US$50m; indicative margins: ~60% gross, ~30% EBITDA, ~25% EBIT. Cash ~US$36m at 30 June; ~US$5m buyback in the last 12 months. Board challenges management to speed up R&D, but management prefers rapid, measured experiments with customer validation.
• Targets/aspirations: lift license revenue from ~24% to ~30% (supporting ~65% gross margin), drive operating leverage to potentially ~40% EBITDA at scale; path to US$100m revenue with better opex leverage.
• Bookings vs revenue (key metric)
• Sales contracts (bookings) are the lead indicator. FY22 bookings were US$82m vs ~US$40m revenue; but in FY23–FY25, total bookings were below revenue. Management aims to reverse this in FY26 (back to bookings > revenue) as growth re-accelerates.
• Revenue lumpiness
• Mix shift in FY25 toward more, smaller, diverse studies (faster revenue recognition) made results less lumpy; however, lumpiness may return in FY26 with visibility on larger Phase 3 Alzheimer’s programs.
• Competition
• Two main head-to-head players in CNS trial endpoints/services: Sign Health and Clario (both PE-owned, broader offerings, larger scale). Cogstate is the smaller, deeper specialist (“inch wide, mile deep”). Potential IPOs for peers depend on market windows.
• Geography & APAC strategy
• Majority of customers/revenue from US and Europe. Growing interest in APAC, particularly China (drug discovery, out-licensing post-Phase 2). Cogstate assessing whether to expand boots on the ground in the region.
• Consumer/GP product (status)
• Prior primary-care push with a partner (ACI) did not gain traction (Alzheimer’s prescribing is specialist-led). Cogstate re-acquired the IP (no cash returned; fewer future payments owed). Options under review: direct-to-consumer assessments, or a white-label with large payers/associations (e.g., Kaiser, Alzheimer’s Association) where Cogstate offers tools (possibly free) in exchange for dataset access to power insights and prevention—still undecided.
• Alzheimer’s pipeline direction
• Expect shift from treating dementia patients to pre-dementia populations (e.g., 50-somethings with risk markers), moving the system from sick-care to health-care (prevention & early management). Near-term data readouts could reshape AD R&D for the better.
• Q&A highlights
• Michael #1 (lumpiness trend & Medidata): Brad said FY25 looked less lumpy due to more small/varied studies; lumpiness could return in FY26 with larger trials; reiterated need to grow bookings and broaden indications beyond AD.
• Michael #2 (Roche “TRAVELER” pre-screening): Brad called it “remarkably insightful”, confirmed Cogstate’s digital assessments are being used alongside blood biomarkers to identify community patients for future AD trials; joked Michael could “hit me up if you’re looking for a job.”
• IR activity: Cogstate admits it had been “a bit st**” at IR; now stepping up because the business is at a scale where wider communication makes sense. Shareholder Day Nov 7 flagged.
• Takeover chatter: On a past approach, there was diligence and a price but it wasn’t announcement-ready; acquirer ultimately did not proceed; disclosure came after market talk. On Medidata (hypothetical) acquiring Cogstate: board is open to value-creating M&A, but the company is not run for sale and is focused on capturing upcoming growth.
• What to watch (management’s own list)
• Bookings growth (sales contracts > revenue again in FY26).
• Early Medidata contribution through FY26–FY28 (share gains).
• Progress to US$100m revenue with license-mix expansion and margin uplift (opex leverage).
• AD trial landscape and movement toward pre-dementia populations.

Cogstate is expecting a fairly decent first half

Unaudited revenue jumped 18% YoY to $23.9M, driven by a 27% surge in Clinical Trials revenue, now 95% of total revenue. Sales contracts for Clinical Trials hit $20.3M, with Alzheimer’s programs being a standout, more than doubling compared to 1H24.

CGS said efficiency gains are showing, with headcount slightly down while revenues grow. Although gross profit margins and EBIT margins remain about the same as the preceding quarter, they are up a lot from the pcp..

The balance sheet looks healthy: cash at $34.2M (up from $30.1M in June), no debt, and an ongoing share buyback.

Cogstate is scaling up via partnerships, which contributed 36% of sales opportunities in 1H25, while continuing to expand outside Alzheimer’s into other indications like cancer and rare diseases.

The PE based on the TTM is roughly 18x. Not terrible if they can sustain sales momentum and unlock more operating leverage.

Cogstate has renegotiated the terms of its license agreement with Eisai -- in essence, Eisai no longer has exclusive rights to distribute Cogstate's digital assessment technology. The catch is that Cogstate will forgo $15m in future minimum royalties (although the main impact wont be felt until FY28).

This allows Cogstate to "progress exploratory plans regarding alternative distribution approaches for our digital cognitive assessment technologies"

Clearly the board reckons this will lead to superior outcomes, and have apparently already formulated some exploratory plans. Importantly, all payments to date will be retained and the relationship with Eisai (which owns 6.8% of CGS).

I take this as mildly good news. You wouldn't bother unless you thought it would result in more income (although hubris can sometimes misinform!)

ASX announcement here

Cogstate has issued FY23 NPAT guidance of between US$0.6-1.6 million (FY22 was US$7.5m, FY21 was US$5.2m)

Further revenue delays and one-off restructure costs (redundancies) of $600k seem to be the issue, with revenue expected to be 9-12% below FY22, and EBITDA margins expected at 9-12% of revenue (formerly guided for 12-15%).

They had also previously said to expect positive operating cash flow, but that's now looking to be US$1m either side of breakeven in H2, following -US$0.2m in H1 (they still have close to $30m in cash).

Restructure costs will be absorbed prior to June 30, and going forward they expect to save US$2.6m annually. The question is, of course, whether they can fulfil their growth ambitions with a smaller workforce (thumb sucking, it looks like the savings represents about 18% of employee and admin expenses). CEO Brad O'Connor reckons that with technology investments and efficiency gains, the business will be appropriately resourced to handle the expected revenue growth. Moreover, these issues of FY23 are "isolated factors that do not impact our medium- and long-term [potential]"

As of yesterday's close, shares were on a forward EV/EBITDA of around 40 so we certainly need to see growth resume if shares are going to do well from here. That being said, the margins can swing around a bit here and revenue can be lumpy -- originally they were guiding for EBITDA margins of 27-29% of revenue -- so if revenue delays abate and trading conditions improve, things could change quickly.

Full announcement here