Cogstate Limited (CGS) Earnings Call Transcript & Summary

Good morning, everybody. My name is Brad O'Connor, the Chief Executive Officer of Cogstate and I want to thank you for joining this June quarter business update. I want to start by just explaining some of the format of this meeting. So we do encourage questions. I have a presentation that I'll go through today, and we'll try and do that inside about 20 minutes. And then I would encourage you to ask questions at the end. We're trying to keep about 10 minutes for question time. [Operator Instructions] So again, we'll get to the end, and I'll point to you if you have questions, but we encourage those. So to start, for all of the 2020 financial year, I've been talking about the transformation of Cogstate's business, and we're now beginning to see that transformation reflect in the financial results of the business. On top of the significant changes to the Healthcare segment of the business, which I don't want to gloss over in any way, the Clinical Trials segment has delivered the best annual sales results that we've ever recorded. At the half year, we indicated that the sales growth would lead to an increase in the second half revenue, and that's exactly what we've seen. At the start of the 2021 financial year, our contracted revenue exceeds USD 15 million, which is an increase of over 40% on our starting position for the 2020 financial year. The stronger revenue and excellent cash collections have delivered cash inflow from operations of $1.1 million for the quarter, which included the receipt of loan funds during the quarter. And in total, our cash holdings increased by $3 million to over $10 million at 30 of June. That's approximately AUD 15 million. And yesterday, we announced that we've added to our growing portfolio of strategic partners. ERT is a large provider of technology solutions to the clinical trials market, and we are very hopeful that ERT will be a significant sales channel for Cogstate in the future. Cogstate was founded 20 years ago with a vision that we could develop technology that would allow assessment of brain health for anywhere and for any purpose. Importantly, with an aging population and increase in Alzheimer's disease and other dementias, Cogstate's goal was to make assessment of cognition as simple as and as informative as human temperature. Cogstate is perfectly positioned to play a significant role in helping to reimagine the shape of evolving health care ecosystems. While we provide this one component of the jigsaw puzzle, we are also helping partners reimagine what that puzzle picture could look like. We have the proven ability to design and commercialize digital brain health assessments. Cogstate tests have been used extensively and are highly validated with unique ability to utilize the same test in clinical trial and in clinical practice. So we're utilizing the same intellectual property across our different product suites. Cogstate's computerized batteries of rapid, reliable, simple and sensitive tasks measure the core cognitive domains that are of interest in research studies. The construct validity of each Cogstate tests for cognitive impairment in various indications as well as the sensitivity of these tasks to change in cognition has been demonstrated in the scientific literature. The tasks have been shown to be valid for using different cultures and language groups with comparative and normative data available for both clinical samples and healthy controls. The study teams that are wishing to measure all or a subset of these names can choose a task that best suit their specific research questions. Each of the tasks have been utilized previously in drug trials and maintain excellent reliability across repeated testing and cross-sectional research design. Cogstate assessments have been reviewed and accepted by regulators the world over. But most importantly, Cogstate has a proven ability and an intent to establish big strategic partnerships to help reimagine and redesign health ecosystems. Proven partnerships, such as our relationships with Eli Lilly in Alzheimer's disease clinical trials, and our involvement in important public-private partnerships focused on treatment of asymptomatic Alzheimer's disease patients, the launch of online cognitive screening in Japan through our partnership with Eisai all demonstrate the ability and the intent to form relationships that challenge the status quo and seek to use our technology to redesign health care. Cogstate has 2 key revenue streams. Clinical Trials is our established business that generated $21 million of revenue in financial year '20. This is a project revenue model that provides us with great forward visibility and predictability of our revenue. The length of clinical trials provides a great tail to build from year-on-year. Healthcare, which is the use of our technology to measure brain health in the community, is our next horizon. It was the basis of our original investment proposition and it's starting to become a reality as we get closer to the release of disease-modifying therapies for Alzheimer's disease. This is subscription-based software revenue model sold through strategic partners, such as Eisai in Japan who have other revenue, and in this case, that revenue being from therapeutics tied to the adoption of Cogstate software. In looking at the Clinical Trials division, Cogstate enters into sales contracts with both pharmaceutical and biotech companies for the provision of Cogstate technology and services for use in their clinical trials. The contract value will differ for each clinical trial obviously, depending on the scope of the technology and the services that we're providing. An increase in the total value of sales contracts will increase the revenue backlog and will, over time, result in increased revenue recognized by Cogstate. Revenue from sales contract is recognized over the life of that contract. The length of the clinical trial can vary from several months for Phase I study up to 4 or 5 years or even longer for a Phase III study. Revenue is recognized based on the achievement of our milestones that are predetermined in that study. During any period, any half year or full year period, revenue may be recognized either from contracts in the backlog at the beginning of the period as well as sales contracts executed during the period. Usually, there's a bit of a time lag between the increase or decrease in level of sales contracts executed and the corresponding change to recognized revenue. The value associated with executed sales contracts has not been recognized at the end of any period as referred to as contracted future revenue. The revenue from these contracts will be recognized upon the achievement of those milestones throughout the clinical trials. That contracted future revenue figure provides really good insight into future revenue performance. I'd go through all of that because I think it's important for everyone to understand the structure of our business, particularly the Clinical Trials business, so that everyone understands the difference between a sales contract and recognized revenue. So I'm going to get into some of the figures now. For the year to 30 June, Cogstate executed $46 million of Clinical Trials sales contracts. The result was an improvement of over 150% in the prior year and a 28% improvement on the previous record that was set in financial year '18. The level of sales contracts executed is a reflection of the accelerating demand of the company's scientific solutions and technologies. Cogstate has seen continued sales growth in rare disease indications as well as a rebound in investment by our customers in Alzheimer's disease, obviously Alzheimer's disease, an area that was negatively impacted through the 2019 financial year after a series of clinical trial failures. So after a very disappointing financial year '19, we're picking up where we left off at the end of financial year '18 with our 2020 results. To go through the revenue numbers, and of course, these numbers are subject to audit review. However, the table here outlines 2 critical pieces of information. The first is that the quarter-on-quarter growth in Clinical Trials revenue has delivered a full year result comparable to the prior year. However, whereas the prior year trended down at the end of the 2019 financial year, 30 June 2020, we are trending in the right direction and back towards those financial year '18 levels where the Clinical Trials segment delivered $28 million worth of revenue for that 2018 financial year. For the first time, the Healthcare segment has delivered significant revenue. That revenue predominantly relates to our agreement executed early in the financial year with a pharmaceutical company, Eisai in Japan. As I mentioned earlier, in the Clinical Trials business, the project revenue model provides us great visibility and predictability of our revenue. At 30 June 2020, Cogstate has over $39 million worth of contracted revenue to be recognized in future periods. Of that amount, over $15 million is expected to be recognized in the 2021 financial year, an increase of more than 40% from the same time last year. The increase in Clinical Trials revenue in the 2021 financial year will be a key driver in the improved financial performance of the company. The contracted revenue backlog provides great visibility for that increase in revenue. For the June quarter, Cogstate recorded a net cash increase of $3 million, including an operating cash inflow of $1.1 million. The operating cash inflow included excellent sales -- with excellent cash receipts, I should say, from our customers, and that's reflected in the reduction in trade receivables, which is down to $4.2 million at 30 June. In addition, during the quarter, Cogstate received a $2.4 million loan under the Paycheck Protection Program as part of the U.S. government's coronavirus aid package. The PPP loan has a term of 2 years. It's unsecured but is guaranteed by the U.S. Small Business Administration. The loan carries a fixed interest rate of just 1%, with the first 6 months of interest deferred. Under the terms of the CARES Act that brought this into play, Cogstate will be able to apply for forgiveness of all loan proceeds used, the U.S.A.-based payroll costs and other specific costs such as rents and utilities and provided that we maintain employment and compensation within certain parameters. Any amount not forgiven is due to be repaid in equal monthly installments of principal and interest beginning 7 months from the date of the issue of the line. Cogstate has applied all of our line funds towards improved payroll costs for U.S.-based staff. Globally, Cogstate employs currently 154 full-time staff. And of this number, 128 or 83% of total staff are U.S.-based employees of Cogstate, Inc. I want to change gears a little bit now and move away from the financials and talk about the other announcement we released yesterday, which is our partnership with ERT. Partnering with great brands enables Cogstate to ride waves through the disruption, generate greater opportunities, ensure that we're at the front end of the food chain rather than the commodity end. This year, we've demonstrated both the ability and the intent to partner in ways that enhance our strategic options. Eisai have provided us the ability to launch our health care offering in Japan with a partner perfectly aligned to build awareness of brain health in what is a very aging society. The Alzheimer's Drug Discovery Foundation, particularly with their collaboration with The Gates Foundation to establish the Diagnostics Accelerator program in Alzheimer's disease, has enabled us to build out a cutting-edge technology solution with non-dilutive funding. And then ERT provides us with the sales distribution channel into a significant portion of the global clinical trials market. On Wednesday, U.S. time -- so we announced yesterday, Australian time, ERT announced that they have partnered with Cogstate to deploy our computerized assessments on their technology platform. ERT have shown an intent to build a business in central nervous system diseases, an area that they're not presently strong in. The recent acquisition of wearable clinical trial technology partner, ADPM, who have expertise in indications such as MS and Parkinson's disease demonstrates that intent. As part of this partnership, Cogstate's computerized assessments will be deployed on ERT eCOA technology platform. And it's important to understand what that means. Most of the studies that currently utilize ERT technology are not necessarily central nervous system disease studies. At Cogstate, we have identified a large opportunity for use of Cogstate technology outside of central nervous system indications with cognition in those indications ex CNS is often used as a safety end point. In safety end points, the ease of use, the ease of administration, and to be honest, the ease of contracting of all critical elements in selection of end points. ERT provides Cogstate with line of sight for hundreds of studies outside of CNS diseases. These are studies that the Cogstate team, our business development team, would not normally encounter. As part of this relationship, Cogstate will leverage the significant business development resources of ERT to access a much larger clinical trials market that we're just not seeing at the moment. So this is a pretty significant commercial relationship for us. Our partnership with ERT provides a potentially significant sales channel for our computerized assessments. So ERT -- and I understand that many of you won't necessarily be familiar with them. ERT is a large provider of the global clinical trial services market. In fact, in 2019, 75% of all FDA-approved drugs came from studies supported by ERT. ERT are partnering with Cogstate because of our great technology and our excellent science. The customers, Cogstate and ERT will provide seamless solution, providing single learning management system, a single device and log-on, a single point of contact for those customers. And our joint offering will support both in-clinic or virtual assessments with automated, error-free administration. And the ability to run remote assessment is obviously a pretty hot topic issue at the moment. And this is an issue that we don't think will go away. So that capability is critically important. The technology work to build out this capability has already occurred. So this is -- we're not releasing an intention here. We've done the work to build out this functionality. We've run validation studies to ensure that the system functions as intended and that we can collectively provide an excellent customer experience. At Cogstate, we use this catch phrase all the time, that is to make the complex simple. It's part of our origin story and how we even came into being. For pharma companies, particularly in indications where cognition may be used as a safety end point, in addition to our excellent science and technology, we're selling ease of use as much as anything. Together with ERT, we've reviewed the deployment of Cogstate technology in clinical trials. And we've compared it to the deployment of standard measures of cognition, and we found we can prove that Cogstate's technology removes many of the complexities associated with the deployment of cognitive assessment in clinical trials. We have evidence to support the claims of a 33% reduction in start-up time lines, a 66% reduction in test administration time, a 98% reduction in administration recording and scoring errors, and a 50% reduction in placebo response rate. Cogstate's science and technology is excellent. Our products work extremely well, and we know that this way, we're consistently chosen to support important clinical trials. What this partnership provides is an opportunity to showcase our offering to a much larger market segment. We have really high hopes for this joint offering. Obviously, it's very early stages. We're just announcing to the market the offering, so very difficult to talk about financials at this stage. But as I say, we have high hopes for it. As we look forward to the 2021 financial year, I think it's important to speak about the impact that the pandemic has had on our business and how we've seen the coming months play out. Firstly, it's really important to acknowledge that Cogstate had a sharp downturn in activity from March to mid-June. I don't think that's going to surprise anybody, and that's what most businesses around the world have seen. Pleasingly, even through that period, we were able to execute $8.4 million of clinical trial sales contracts during the June quarter. But to be honest, most of that work was really to execute at the end of March when the pandemic was [ just ] and the lockdown provisions were just started. And after that, we really didn't see a lot of activity until mid-June. But we knew that our customers were still planning studies. Pharmaceutical companies run clinical trials as part of their business and they won't stop doing that. But part of our concern was that all of our customers would contact us looking to initiate new studies at the same time. And there's evidence that the wheels of the clinical trial machine are indeed starting to roll again. We've been looking at some of the important reference points in terms of activity. And I think one of the -- one of those that's interesting to look at is the amount of clinical trial sales proposals that we're issuing. In July of last year, that is July 2019, we issued a total of 15 sales proposals for the month. To compare that to this year, so far this month, we've issued 14 sales proposals with another 14 due to be issued to customers before the end of this month. So in rough terms, the amount of sales proposals that we expect to issue in July 2020 is up almost 100% on the same time last year. Obviously, in -- mostly what this represents is a flow on from the lack of activity occurred throughout the June quarter. But I think it's still informative to say that we're starting to see that turnaround and we're starting to see the initiation of those new clinical trials. It's our intention to provide an update in respect of sales achieved for the September quarter-to-date when we release our financial results on the 26th of August. Obviously, in the coming weeks, our team will begin to support the ERT business development team. In time and perhaps set around the time of the AGM, which is planned for the 27th of October, we'll update the market as to how that initial outreach and business development activities are progressing. I want to touch on news that's relevant to the Healthcare part of the business as well and that is that Eisai, along with a development partner, Biogen, have recently announced that they've completed their submission to the FDA for approval of aducanumab as a treatment for Alzheimer's disease. It's probably worth spending a few minutes to talk about what that means and what are the next steps. So following this submission, the FDA has 60 days to accept the filing, which will kick off a review of the application. Assuming that Biogen and Eisai are able to get a priority review, which we expect given the unmet medical need, the FDA has 6 months to complete that review. That time line provides for a decision around March of 2021. There's an expectation that the FDA will hold an advisory committee to get experts to weigh in on that package that was submitted, which would likely occur in the coming months under a priority review. Now obviously, Cogstate has no insight into either that submission or the FDA's views in relation to it. But for Cogstate, the general thesis is that a release of a disease-modifying therapy for Alzheimer's disease will increase demand for cognitive assessment as payers, patients and doctors all have to consider whether -- consider the question of who will benefit from the treatment. In that environment, there's substantial opportunity for growth in our health care business. In the Clinical Trials business, we start the financial year '21 with the best contracted revenue position that we've ever enjoyed, as I've mentioned earlier, over $15 million of contracted future revenue in that segment. So we look forward to growing revenues in the Clinical Trials segment throughout the 2021 financial year. And with that and almost on time, I want to pause and open the lines for questions. [Operator Instructions]

Thank you so much, Brad. Appreciate the presentation this morning. Folks, my name is Ruth Ray. I'm the Marketing Manager here and I'll be moderating the Q&A portion. Now several questions that have come in, and I do believe I've seen at least one hand raised. So we will be getting to all of these as we have the time for. First, Brad, this question came in a little bit earlier on in the webinar. So you have touched on a couple of these points already, but I think it still poses some interesting questions. So the question is with the $15.35 million contracted revenue for full year -- financial year '21, how big is the risk of some of the trials being delayed due to COVID? And then is there scope for additional services on these trials, modifying the measure due to COVID restrictions? And then for the financial year '21, should we expect stable gross margin and OpEx level similar to financial year '20?

Very good questions. So look, in terms of potential delays to trials, that's certainly something that we're seeing. Interestingly, we're seeing most studies to be able to push through with trials that are ongoing. The issue to date has been more around trials that we're initiating or getting started. So we're seeing a lot of testing to be able to continue through the lockdown periods. And you're seeing a difference there between the full profit centers and the academic research institutions. Largely, the academic hospitals have been more impacted by COVID in terms of their participation in clinical trials and the 4 proper clinical trial centers, which have been able to push through or had a willingness to push through these periods. So that's something we continually have to monitor. The second part of that question is, yes, absolutely, we are seeing an increased demand on services in Cogstate to help facilitate remote assessment in those trials. So it's a double-edged sword for us. Sometimes it leads to a delay in activities. And in other times, it actually leads to an increase in activities to help the -- our customers navigate the situation. The second part of the question just in terms of what we're seeing in terms of margins going forward. The margins that we will record for the financial year '20 are actually the gross margins, particularly in the clinical trials business, are actually down a bit on where we'd like them to be. And to some extent, that reflects the lower levels of revenue that we recorded in financial year '20, that sort of $21 million worth of revenue. As our revenue increases in financial year '21, we expect to be able to see an increase in margins in that part of the business.

Great. Thanks for that insight, Brad. I see that we have a hand raised from [ Dennis Hume ]. [ Dennis ], I'm going to go ahead and unmute your line now. All right, 1 second. All right. [ Dennis ], you are unmuted, if you're able to ask your question.

Brad, you mentioned that you're seeing a number of proposals going out. Can you talk to us about what's the typical turnaround time between proposals going out and signing contracts within your business?

Yes. Thanks for the question, [ Dennis ]. I think the short answer to that is there's nothing typical around those turnaround times. It can vary substantially depending on whether people are -- where they are in their sort of organization stage and how quickly they want to go. The -- as a general rule for the largest studies -- so the bigger opportunities take a longer time between proposal and contract execution. The smaller studies are quicker to execute. So smaller studies could be a matter of weeks. The larger studies could be a matter of months. So it does -- it varies substantially.

Thanks, Brad, and thanks, [ Dennis ]. Next question, Brad. This one says, can you give some insight with respect to the type of discussions you are having with potential partners on the Healthcare side of the business?

So I'll answer that to the extent that I'm possible -- that I can, and you'll understand that we're subject to CDAs in respect of that. But what I will say is we've got the discussions progressing between Cogstate and relevant parties with respect to the need to measure cognition in the community that would be associated with the launch of an Alzheimer's disease therapy. In thinking about what is the role that technologies like Cogstate could play in that regard, the -- it's multifaceted. It looks at the need to particularly assist primary care physicians to assess cognition, so your general practice doctors who are not necessarily well trained on the diagnosis of mild cognitive impairment or the early stages of Alzheimer's disease and need assistance in the form of technologies that can both make the testing of cognition simple but the reporting of those outcomes very clear. And that's critical in the context of a potential disease-modifying drug. And so in this case, if we focus on aducanumab, which is the Biogen-Eisai drug that's been submitted for approval, you're talking about a drug infusion there. And you're talking about a number of different steps that we consider it probably unlikely the prescription will come from primary care doctors because of the need to verify levels of amyloid in the brains of the potential patient and the level of cognitive assessment and the level of sophistication needed to diagnose MCI. We suspect that there will be referrals from primary care doctors to specialist doctors. So again, one of the important aspects that a tool that Cogstate can play is in really triaging our priority, prioritizing those referrals from primary care doctors to specialists, so how do we get better referrals to specialists. And then there's a sort of third role that Cogstate technology can play in. And that's the idea of filling the funnel. So the identification of community-dwelling people who are suffering from cognitive decline that could be associated with mild cognitive impairment or mild dementia. We know for a fact that the diagnosis of dementia is underreported. It's underdiagnosed. And so there's community-dwelling people who need to be pushed to a doctor in the event of a -- the release of a disease-modifying therapy so they could seek treatment. And so there's a role for Cogstate technology to play in that direct-to-consumer launch of technology as well to identify those patients. And that's where it's really critical the work that we've been doing around the development of smartphone-based assessments. We think the direct-to-consumer market is going to require technology that's easy to access, and those smartphone-based assessments are going to be a critical component of that.

Thanks, Brad. And to that point, we had a question come in about the ADDF development project. And the question is how is the app going to be commercialized? And is ADDF going to bring the app to market and share revenue with Cogstate?