If you’re wondering why the share price is up 50% this morning.

LECANEMAB CONFIRMATORY PHASE 3 CLARITY AD STUDY MET PRIMARY ENDPOINT, SHOWING HIGHLY STATISTICALLY SIGNIFICANT REDUCTION OF CLINICAL DECLINE IN LARGE GLOBAL CLINICAL STUDY OF 1,795 PARTICIPANTS WITH EARLY ALZHEIMER'S DISEASE

https://www.prnewswire.com/news-releases/lecanemab-confirmatory-phase-3-clarity-ad-study-met-primary-endpoint-showing-highly-statistically-significant-reduction-of-clinical-decline-in-large-global-clinical-study-of-1-795-participants-with-early-alzheimers-disease-301634888.html

Conference Call & Investor Briefing

A few things I found interesting from today's conference call:

1) Despite the fantastic growth, Cogstate only have 13% market share of their target Alzheimers trial market. When pressed on the issue the CEO stated that he believed we are only seeing the start of the increase in Alzheimer's drug trials, and that this market will continue to grow into the medium term. It is the companies goal to continue to gain greater marketshare in a rapidly growing market through the demonstration of the high quality service they provide.

2) Ongoing significant future contracted revenue. You can see for instance the future contracted revenue for FY23 is well over the actual revenue for 1HFY22.

3) Anticipated growth in Healthcare sector as another growing revenue stream. And as the NouKnow and Cogmate tools grow, they anticipate the collection of a large and potential valuable database from which they may be able to leverage in the future.

Another ripping quarter from Cogstate with record increases in clinical trials sales up 141%, contracted future revenue up 78%, 1H22 group revenue up 67% and 1.5mil cash inflow. 90% of the clinical trial sales are attributed to Alzheimer's. The strong Alzheimer's drug research tailwinds continue to be realised.

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02477598-3A585674?access_token=83ff96335c2d45a094df02a206a39ff4

@nerdag you seem to have spent an inordinate amount of your spare time attempting to debunk Cogstate as an investment, which I guess is your prerogative, however you’ve drawn some pretty significant assumptions and conclusions. To the uninformed these may seem reasonable, but to others, these do not stand to reason. Let’s unpack your latest foray:

Drug Pricing

Firstly, the cost of drug pricing is incredibly complex, and is reliant on myriad of global and local market factors including but not limited to:

·       Whether or not a country has a global subsidy program, and the drug is question is included in this program

·       Company monopoly

·       Seriousness of the disease

·       High cost of development

·       Lobbying power of pharmaceutical companies 

·       Patency

·       Generics 

·       National policy 

As a new drug class coming to market, it’s not uncommon for drugs to be very expensive. But over time as the above market forces change, eg new drugs, better drugs in class, better drugs out of class, drugs from different companies, patent expiration, production of generic and biosimilars etc. the natural tendency of them is to reduce in price. This study demonstrates that: Prices of Generic Drugs Associated with Numbers of Manufacturers. N Engl J Med. 2017;377(26):2597-2598.

Additionally, the large markets such as America and Asia have very complex pharmaceutical industries relating to drug pricing. A good run down of the US is for those unacquainted is here: https://stockmarketnerd.substack.com/p/goodrx-deep-dive. Regarding the Asian markets I haven’t done the due diligence to comment. But in the US drug expense has been a perpetual problem. Drug pricing reform has been high on the political agenda for some time as highlighted by Joe Biden in his first address to congress. Trump also had a Blueprint for the same. Further, the FDA has an action plan specifically for biologics to increase competition and reduce costs. The Biologics Price Competition and Innovation Act (BPCI) was enacted in 2010 with the intent of “balancing innovation and consumer interests” by creating an abbreviated pathway for the approval of biologics demonstrated to be biosimilar to, or interchangeable with, an FDA-licensed reference product.

Additionally, as it stands, the evidence for aduhelm is poor and its one of 4 drugs in class that have breakthrough approval. So, it’s absolutely no surprise that its expensive. It makes perfect sense. The reinvigorated push for Alzheimer’s drug development, not only in this class but others, has the potential yield better drugs with better evidence, better side effect profile and steer market forces towards cheaper drugs. We already have drugs that are likely better than aduhelm such as Donanemab (https://www.nejm.org/doi/full/10.1056/NEJMoa2100708). As far as I’m concerned, the only relevance that aduhelm has in my investment thesis is that it’s the first in class to gain breakthrough FDA, which in the past, has meant a huge push for development of more drugs in class. The first in class drug is traditionally terrible. Limited therapeutic benefit, bad side effect profile, just like Aduhelm. Overtime they slowly get better, and we find genuinely meaningful therapies. We’ve seen this pattern time and again over the course of history. Further, as more drugs come out, we will likely see trials with combinations of drugs (eg different class combinations) which may have the same effect. It is also anticipated by many that 1-2 drugs will gain full FDA approval in 2022. 

As such, it is entirely plausible that the cost of these drugs will reduce significantly in due course. Is any of this guaranteed to happen? Of course not. There are no guarantees in life or investing. But based on history, market forces, research and technology, and political agenda, it’s very possible. And an investment thesis requires time to playout, which is what is happening as we speak. 

“Tighter screening and diagnostic criteria means a bias to more established and readily accessible tests.”

As you’ll know Eisai and cogstate have developed an app, Cognigram, for PC or tablet for screening by doctors and I assume you’ve watched the demo. It couldn’t be simpler or more efficient. It takes 10-15 mins. Can be done in a clinic or in the convenience of the patient’s home on their own devices. Validated for perioperative delirium, concussion as well as dementia. Periop delirium and concussion are topical areas of research in their own rights as well as being increasingly common areas of clinical interest. It’s super simple based on 4 card tests. Reports and analytics are fully automated, making it also time very efficient for clinicians. The tests have been validated and used in over 1400 studies worldwide and Cognigram is FDA approved. I’d say that sounds pretty well “established”. Further, if a patient can do the test on their computer sitting on their couch at home, how much more accessibility do you want? Well, they’re putting it on smartphones next year so patients can do testing wherever the hell they desire. 

You then draw the conclusion that “Cogstate's battery thus remains limited to utility in the clinical trials space, rather than of any meaningful impact to the end user.”  This seems a little rash given the aforementioned.

Lastly, and most importantly, I am up 120% on my CGS investment IRL. The company has guided 50-70% revenue growth for FY2022. Last quarterly had clinical trial revenue up 93% PCP & record healthcare revenue up 255% PCP. Clinical trials revenue backlog of $40M & Healthcare revenue backlog of $42M. $23M in cash. Debt/equity 0.05. 27% ROE TTM. In the US alone there were 126 drugs under investigation and 152 clinical trials being performed in 2021 (https://alz-journals.onlinelibrary.wiley.com/doi/10.1002/trc2.12179.) This represents a healthy company with strong short to medium term tailwinds. Is there risk? Of course there is. There always is. But the numbers don’t lie. Therefore, as a very part-time growth investor, if all my investments looked like this, I’d be a pretty blood happy investor. 

Gantenerumab, yet another amyloid beta monoclonal antibody, given FDA breakthrough therapy designation on the basis of amyloid plaque reduction. Strong momentum in this space.

https://www.roche.com/investors/updates/inv-update-2021-10-08.htm

YouTube video from the big dog  Bill Gates feat. Cogstate

https://youtu.be/N-xYhFoqcyI 

@AlphaAngle you make very valid points, and the controversy surrounding Aduhelm has been very publicly documented. There is a excellent article in the New England Journal of Medicine from last month that details the history and current state of play regarding Aduhelm and how and when it should be prescribed with the current controverisla evidence. But it also provides a counter-argument to your conclusion regarding the drug class hitting a brick wall should Adhuhelm be pulled.

Firstly, It states that "phase 2 RCTs demonstrated that two additional anti–beta-amyloid monoclonal antibodies, lecanemab and donanemab, cause similar reductions in amyloid on PET, with accompanying slowing of decline on clinical scales." These trials were only published this year. And goes on to say that "These additional data provide supportive (if not definitive) evidence that reducing beta-amyloid during early-stage disease can modify pathophysiology and provide clinical benefit, which is the premise of the FDA’s acceptance of amyloid lowering as a surrogate biomarker." ie the drug class appears  promising.

Secondly, Adhuhelm is a "first in class" drug, meaning its the first of its kind to be approved. Other once-considered untreatable disease like multiple sclerosis, cancers and HIV all have histories of poor first-in-class drugs that opened the door for further drug development that are now successful mainstay therapies. As such the article concludes "The modest clinical benefit observed with beta-amyloid–targeting antibodies should encourage development of drugs targeting other elements of Alzheimer’s pathophysiology (e.g., tau or neuroinflammation), which in combination with amyloid-based therapies might affect the disease trajectory more profoundly."

Cogstate make computerized cognition tests used in clinical trials for neurocognitive diseases such as Alzheimer’s Disease (AD) and schizophrenia. They also have a digital screening tool for Alzheimer’s diagnosis in the community (Cognigram).  The tests are often fairly simple. For example, You ask the patient a few questions to test the various domains of cognition (eg. short term memory, or executive function), they get a score, and this score generally identifies the severity of impairment of that domain or tracks the trend. If you’re trialing a drug, you might use the cognition test before, during and after treatment to observe its effect, and you’d publish this data in your journal paper. Seems basic, however, for a test to be used as a standard in drug trials they require significant academic validation (as in hundreds of trials) before they will be used by pharma in their trials. Cogstate has achieved this, helped by being bankrolled early days by a billionaire investor.  This is their moat. Once a researcher uses a certain tool or measure to ascertain outcomes, generally they with stick with it to make previous trials easily comparable. It’s the yardstick. This is also true for other researchers who want to compare to prior research of other drugs in the same class. It unifies the body of research and, as such, this stickiness compounds over time with each trial. Cogstate has been used in over 1800 clinical trials. They’re biggest in the world in this niche by some margin and the more research in AD the better. 

For the last 5-7 years Cogstate have been riding the coat tails of the heavily researched Alzheimer’s drug market, including a number of late-stage drugs. A huge market, in addition to other diseases that affect cognition including HIV, multiple sclerosis, paediatric and adult oncology, Parkinson’s disease, epilepsy, and schizophrenia. Big clients have been Elsai and Eli Lilly.

They have partnered with Elsai, leading Japanese research company. This has resulted in 2 key things:

1)    They developed the Cognigram screening product to screen the general population for Alzheimer’s, as well as screening/monitoring for drug response in the community. Cognigram is aiming to be THE test to diagnose and allow people to be prescribed Alzheimer’s drugs. 

2)    Elsai created the drug Aduhelm which reduces the amount of amyloid plaque deposition on neurons, which is thought to contribute to the underlying Alzheimer’s pathophysiology. Adulhelm was recently approved by the FDA for Breakthrough Therapy in early stage AD. This approval was huge in this space and will likely be the catalyst for more research. Cogstate did the Adulhem trials, and therefore other companies are inclined to use Cogstates tests for comparison… you get the idea. And judging by the trials already booked by cogstate this quarter (double the previous quarterly record), its already paying off.

The number of phase 2 and 3 trials occurring for Alzheimer’s drugs is growing. It’s a hot market because while we’ve seen drugs that MAY improve or slow progression of early-stage Alzheimer’s, nobody has definitively cracked the code yet. Especially in later stages of the disease progression. The carrot is metaphorically dangling. The market is huge, and it would be a quantum leap in medicine to be able to meaningfully treat the disease on a large scale. 

COVID tailwinds have occurred secondary to decentralized trial models. This means patients take the drugs and get monitored at home through telehealth and data is captured electronically, as opposed to being in a major clinical facility. This improves patient trial recruitment, and suits Cogstates digital platforms. 

FY21 was Cogstate’s best by some margin.

-       Record revenue of $32m up 44% on PCP

-       NAPT $5.23m (-$1.96m PCP)

-       Cash flow positive with $22.4m in the bank

-       No debt

FY22 outlook:

Net new sales contracts executed so far in Q122 total US$35.4m, which is double the previous record quarterly sales and is equal to 75% of the record total sales of US$47.3m in FY21.

Tailwinds of trial decentralisation, increase in AD trial activity by other Pharma companies  spurred by recent Aduhelm FDA approval, potential regulatory apporval of Adulhelm in other countries.

Held