Cogstate Limited (CGS) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the presentation of Cogstate's financial results for the year-end 30 June 2022. I'm Brad O'Connor. I'm joined on this call by Darren Watson, who's our CFO. Thank you for your attendance. Just a quick note that all the information presented today should be read in conjunction with the annual report, which was lodged with the Australian Stock Exchange earlier today, along with other documents that have been launched. We will take questions at the end of this presentation. [Operator Instructions] And with that, I'll get into the presentation. So -- and there's some standard materials here that we've presented before, and many of you will have seen this, but I think it's important to just remember that we -- Cogstate's mission is to improve and make the assessment of cognition much easier than it has been traditionally. We're combining our science and disruptive digital innovation to make it as simple as measuring blood pressure or taking a temperature. The company is growing and has grown over the last 20 years, and we're really proud of the growth that we've achieved and the financial results that we're going to present today. Just as a reminder, Cogstate was founded in Melbourne, Australia, but most of our workforce is located in the United States, 74% of our workforce located in the United States. We have small teams in each of the U.K. and Japan. So around 200 employees, full-time employees now, but a global team of coming up on 400 team members, including our consulting neuropsychologists who work with us around the world. We sell our technology and our services into 2 different markets. Our largest customer base is pharma or biotech companies who are developing new drugs. And in that context of those customers, we provide them with our technology to help them measure cognition as well as our services associated with that. The other markets, what we call the healthcare market, where we're seeking to have our technology used by consumers as well as primary care physicians, in that market we've licensed our technology to Japanese pharmaceutical company, Eisai on a 10-year global license agreement. Technology, we've spent more than 20 years to developing it in scientifically and commercially validating that. We support all of the top 10 pharma companies around the world, we run more than 2,000 academic and clinical research trials. Our tests have been administered more than 2 million times. Our technology is, as I said, really well validated. The computerized assessments themselves work on standard construct of neuropsychological assessment but they've been designed with computerized assessment in mind and it provides a range of advantages above a standardized assessment stuff such as automated scoring, they're really brief assessments. They have high ability and acceptability by our patients. They're designed to impact or practice or continued or serial assessment by minimizing active language and culture. And there's strong scientific validation of these tests through hundreds of peer-reviewed journals, so across more than 65 indications, how technology is being validated. And we work across all of these indications with a particular focus in terms of our financial results, at least in Alzheimer's disease. When we're talking about our clinical trials business, it's important to remember that we're talking about a software and services business. So not only do we provide our own proprietary assessment of cognition but will support the use of other assessments of cognition in those clinical trials. We'll do that in conjunction with technology partners, what we refer to as eCOA partners who were providing the digitization of those standard neuropsychological assessments, will provide work around the in-licensing of those assessments, the training of site staff to use those assessments, will audit the findings of those signed staff and essentially monitor that. We will provide statistical analysis and scientific consulting. So a full range of services in our clinical trials business. The healthcare business is much more just a software sale. Having a look at the financial year '22, some I think, really important developments that we've highlighted here across the FY '22 year. We formed a Scientific Advisory Board of world-class neuroscientists who are helping us as we continue to push our science forward and also helping us as we think about expanding our customer base and these scientists that are routinely called upon active scientific advisers for the development of new protocols in clinical trials. And so they also form part of an important outreach program for us. We announced during the year the expansion of our partnership with a company called Clario, who are a provider of technology solutions into clinical trials, that partnership is going very well and really just reflects a broader goal that we have of using similar companies as channel partners as we seek to expand our market share in that clinical trial space. We've highlighted here one Phase II study in Dementia with Lewy Bodies. We've highlighted that because of the use of our digital assessment as the primary endpoint in that Phase II study. Obviously, over time, as we seek to scientifically and commercially validate our technology, the increased use of that technology as one of the key endpoints to determine the success of that study is really relevant and really important to us. And just again, displays that growth of acceptance of our technology in Alzheimer's disease but also in other forms of dementia, such as lewy bodies dementia. We've continued to expand the launch of our technology to consumers across the Asian region in conjunction with Eisai. We launched our products in Taiwan and Hong Kong during the financial year '22. And those launches have gone very well. We've expanded our involvement in major industry initiatives. We've continued with the Davos Alzheimer's Collaborative, and that's been really important as we've partnered with them to launch the trial of our primary care physician tool, which is called Cognigram in a health care or a health network in Florida in the United States. We've joined the Digital Medicine Society for Alzheimer's disease and related dementias and we've joined the decentralized trials and research alliance to just other industry associations that just reflect the growing understanding of Cogstate's offering in the industry. And we've increased the adoption of decentralized clinical trials, and I want to spend a little bit of time talking about that. Cogstate is working across -- when I talk about decentralized clinical trials, what I'm talking about is some aspect of home-based assessment or assessment that's occurring outside of the central clinical trial site or research hospital. We are supporting the remote cognitive assessment in a range of different diseases such as Alzheimer's disease, mild cognitive impairment, frontotemporal dementia, Parkinson's disease, multiple sclerosis, post-traumatic stress disorder, oncology, cardiovascular disorders and a range of different neurodevelopment disorders in rare diseases. So a huge range of different areas that we're working. In doing that, we're providing not only the Cogstate computerized assessments, but we're also supporting vitality health assessments, a range of other standardized measures that are listed there on the screen. We're doing this around the world in North America, Europe, Asia and Australia. And we see this as a really important way in which we grow market share and we grow our offering in that clinical trial space. We see this as an area which is going to continue to grow the use of this remote assessment of cognition. And we think that's a really important factor in how we continue to grow our business over the next few years. To touch briefly on the financial results, and I'll hand over to Darren in a minute to dig into these financial results in a bit more detail. And again, most of these pretty well flagged in our most recent quarterly update. But USD 82.5 million of clinical trial sales contracts executed during the year, which is up 74% on the prior year. That means at the end of June 2022, we have over $139 million of contracted future revenue that will roll off in future periods that pipeline of future revenue up 37% on the prior year. We recorded USD 45 million of revenue for the year. That's up 38% on the prior year clinical trials, revenue up 41% to just over USD 40 million. Our profit before tax was a record $10.7 million profit before tax. That was at the upper end of the range that we provided just a month ago, and the result was up 84% on the prior year. Really strong operating cash flow, $9 million of cash inflow from operations during the year. You can see there that's down on the prior year, but it's important to note that the prior year included $13.8 million of proceeds or net proceeds from the upfront Eisai payment. So on a like-for-like or continuing business basis, really strong growth in operating cash flow is leaving us with just over $30 million of total cash of $28.7 million of net cash at the end of June, a really strong cash position with no debt. We have a look at how that contracted sales growth has delivered revenue growth over the last couple of years. We can see that with revenue growth, we've been able to show profit growth. EBIT or earnings before interest and tax here really is equivalent to profit before tax in our business with given that there's no real interest expense. And so we're seeing that financial leverage. We're committed long term to a financial model that provides EBIT in the range of 20% to 24% of revenue. So what are the factors that impact that range, really, what we're talking about there is the mix of revenue. So the license fee revenue mix versus services fee revenue mix. And obviously, to the extent that license fee revenue is higher, we see much grower margins with that. And then also just allowing for the fact that we may invest in different technology advancements through a year which may push us towards the lower end of margin range. So that 20% to 24% though, as we look forward, really committed to that financial model. And as a general statement is revenue to increase margin should increase as we get further leverage from those operating costs in the business. We have a look at sales contracts in terms of value, but also where are we generating that value. We see that $82.5 million of sales contracts again up substantially on the prior years. 84% of that was related to Alzheimer's disease clinical trials, which was up from 65% in the prior year. 73% of the value of those sales contracts in Phase III studies again, compared to 20% in the prior year. So we're seeing that increase in value of sales contracts that we're pushing into more and more Phase III clinical trials. When we look at our contracted revenue backlog at June 30 and compare that to the prior years, what we can see is that backlog has increased. And particularly as we look out to years 2 and 3, we see really substantial growth in that revenue backlog, which gives us great confidence about revenue growth in future periods. Looking at the ongoing trials at June 30, 2022, we have 123 ongoing trials. And I think it's really important to note that 80 of those are in Phase I and II trials. So that's where we see a lot of our growth coming from. As those trials push when they're successful, that is, of course, when they push from Phase I and II into later-stage trials. And obviously, we understand the value of particularly those Phase III studies had and the impact that has on our contracted revenue and therefore, our revenue pipeline. Looking at Cogstate's share of the Alzheimer's trial market, we've updated the slide that we provided at the half year. You can see there that for ongoing trials that have been initiated since the 1st of July 2019, Cogstate now accounting to 17% market share. That's up from 13.3% as of the data we presented at the half year. So we're growing that market share. I think what's important to focus on there is you have a look at that Phase II market share of 20% we haven't seen the same level of growth in Phase III because obviously, that will take time as we need Phase II studies to push into Phase III. But we're seeing that substantial growth in those sort of Phase I and Phase II studies, which is really encouraging and points to a strong performance in the future. With that, I'm going to pause. I'm going to hand over to Darren to dig into the financial results in a little bit more detail.

Thanks, Brad. So as Brad broadly outlined, our financial year 2022 was a very strong year for Cogstate, several new records. Revenue came in at $45 million, which was a record high for Cogstate, up over $70 million from financial year '21 year-to-year growth of almost 38%. Strong growth in Clinical Trials revenue and a full year of -- from our Eisai global licensing agreement in our healthcare business both contributed to the strong revenue performance. Our contribution margin for the year came in at a record 59.3%, up more than 4 percentage points from FY '22. Our Clinical Trials business was the primary driver to our margin growth as revenue mix and improved productivity in that business continue to take it to record margin levels, and I'll cover that in more detail in just a minute. The record revenue and strong margin performance has resulted in an EBITDA of $13 million. Again, a record for the company, more than double what we achieved in FY '21 and importantly gets us to an EBITDA margin of almost 29%. That result illustrates the operating leverage in the business that we have talked about, that Brad covered just a short while ago, where the growth in the Clinical Trials margins and the leverage of the higher revenue created against our operating expense yields to higher margins at both EBITDA and EBIT level as the business grows. So really illustrating that leverage across the business. The record EBITDA performance has also meant a record profit before tax, which is coming to 10.7%, which, as Brad mentioned before, is at the upper end of the guidance we provided back in July and has grown 84% year-to-year. This record result is a result of the record levels of revenue, but also a continued focus on productivity, particularly within our clinical trials business and careful cost of management across all parts of the business. As I move to the clinical trials business, a little bit more detail on Page 19. You can see in more detail the strong performance of the business. Revenue at $40.3 million for the year, coming from the strong opening backlog position we had, that was about $24 million at the start of the year. So we've added almost $16 million during the year from the new sales performance of $82.5 million that Brad touched on earlier. That's despite the fact that we have seen a delay to some revenue into future periods with one of our largest studies continuing to experience some enrollment challenges and a couple of studies put on hold pending FDA reviews as they try to clarify some aspects of the protocol. From a margin perspective, the business burden from higher software licensing mix and improved productivity. The software license mix was almost 22% of full year revenue as opposed to historical levels of around 18%, 19% and really reflects our success in having Cogstate technology included as part of protocols across the portfolio of studies that we do. The improved productivity results comes from the continuing shift to agile practices across our clinical trials business. And also, we continue to invest in tools and processes that drive efficiency and the way we deliver our services. If I go to the next chart, it will detail for you our future contracted revenue position and backlog coverage. The chart on the left details of the backlog runoff and shows that for FY '23, we start with a solid foundation of $30 million of revenue under contract. Though that is a little lower than what we had expected, given the delays I mentioned earlier, where one of our largest studies has moved out with the delays in patient enrollment. And those couple of studies that have gone on hold, as I mentioned, which are pending FDA reviews. In addition, we got $4.2 million of health care revenue, which is the amortization of the Eisai global licensing agreement. So we start the FY '23 year with almost $34 million of revenue under contract. Importantly, what this graph does show is that both FY '24 and FY '25, are growing with almost $33 million of revenue under contract for FY '24, with a further 12 months of signings or sales to go to build that backlog. So really positioning ourselves for growth beyond FY '23, but also FY '24 and '25. To the right-hand side, the table shows the beginning of the year backlog as a percentage of full year revenue. So for FY '23, you can see that backlog coverage lifted to 61%, something we shared a year ago that the business grows, we expect to see backlog as a percentage of revenue become larger, just simply through the scale of the business. If I now move to Healthcare. You can see the revenue for the full year was $4.5 million, which reflects the fact that we had a full year of the Eisai Global Licensing revenue and therefore, growth in the year of almost 19%, up from $3.8 million a year ago. The margin for the year at 72.8% was aligned with the guidance that we gave. The increase in costs reflecting the factor we have brought on additional skills and capability to make sure we're well positioned to support Cogstate as they look to roll our technology under the licensing a premium into the additional territories that we discussed a little earlier. Finally, if I just go to cash flow, pleased to record a particularly strong second half and fourth quarter in particular. We exceeded the guidance we put back in the half year, with net operating cash flow of $9 million compared to the prior year, $16.8 million. But remembering, as Brad said just a little earlier, within that $16.8 million, $13.8 million of that came from the upfront payment from the Eisai licensing agreement. So the $9 million represents a really strong growth from the core business activities on a year-to-year basis. Focus on our payment terms and collections across the business, really resulted in that strong operating cash flow performance, particularly in the second half. As you can see, our investment cash flow was higher year-to-year, but largely a result of the benefit we got in the prior year from a grant -- the government grant. We had no such grant this year. But you will see we have a slightly higher capitalized software development costs. We've consideration work undertaken over the past year on the underlying infrastructure that supports our Cognigram platform, which we have undertaken to ensure that, that technology is in a robust mode to support the rollout of Cognigram under the Eisai arrangement into those additional markets. That leaves us with a strong net cash flow, net cash increase of $7 million for the year, takes us to a really strong net cap position at the end of the year of $28.7 million, adjusting for post-repayment or a gross balance of $30.6 million. So in a really strong cash position. With that, I'll hand back to Brad.

Thanks, Darren. What we wanted to do to close out was to really just take you through the financial year '23 outlook and what we're seeing at the moment. There's some continuing really important factors that are impacting our business. We're continuing to see Alzheimer's R&D spend increase, and that's positively impacting our Clinical Trials sales did through financial year '22, and our expectation is that, that will continue through financial year '23. I touched on it previously, but the decentralized trial design in that virtual assessment with the in-home assessment of cognition really complements our offering both from our digital proprietary assessments, but also our ability to deliver those telehealth-style assessment through our consulting neuropsychologists. We've got a really good offering there and we're seeing substantial growth in that part business or that offering. And that's a trend we expect to continue for a number of years. And in fact, we really don't see the industry going back to how it has operated with all of those assessments traditionally or happening at site. We're seeing growing success of our ability to sell through our channel partners such as Clario, we think that's a really good long-term trend, and we're very focused on that as a means by which we can increase our customer base and increase market share. There's obviously also some external data release that could impact our business over the course of the next year. Eisai in their most recent earnings call, announced that their top line data from Eisai Phase III CLARITY AV study of lecanemab in early Alzheimer's disease is now scheduled for the end of September '22, so approximately 1 month from now. And so we eagerly anticipate that data. Roche's gantenerumab data expected again in the December quarter. But probably less expectations in relation to that Roche in there and it's all noted that, that data was -- that we weren't expecting that data necessarily to be positive, but they expect to learn a lot from that. Lilly's data from their Phase III Alzheimer's disease trial called TRIALBLAZER, the drug donanemab expected to read out in mid-2023. So there's a lot of data that's expected over the course of the next 12 months. No doubt it is one or more of those Phase III studies are successful, it will positively impact our business, both the Clinical Trials business as well as the Healthcare business. There's also the risk that all of those data -- all of the data from those Phase III trials is negative, that we could see some short term downturn in terms of new contract sales in our -- particularly in our Clinical Trials business. So we wait like everybody else for the release of those data over the course of the next 12 months. When we look at the business, our business in a bit more detail, having a look at sales contracts executed through the start of the September quarter, just over $16.5 million of sales contracts already executed through July and August. So obviously, that's up substantially from the $9 million we executed in the -- through the whole of the June -- the most recent June quarter. So that's really encouraging. Again, we're seeing a lot of work there in Alzheimer's disease. In terms of our revenue expectations, a little muted at this stage -- at this very early stage of the year, I should add, just based on what we're seeing currently, Darren mentioned that the revenue that is pushed into future periods, approximately $4 million of revenue pushing out from our estimated financial year '23 revenue into future periods. So with that, we we're expecting our first half revenue to be consistent with that June '22 half year result. That is slightly less than the first half of '22 result. As we look forward to the second half of '23, we're not providing guidance for revenue at this stage in relation to that. That revenue for the second half is going to vary considerably with the level of sales contracts we execute particularly over the first half of the financial year as well as what will happen in terms of the recognition of revenue from those trials that have either been delayed or where the revenue has been delayed. There is a possibility that we'll see some of that revenue pull back into financial year '23. And so we're just going to wait and see how those trials play out before providing more detailed guidance in relation to the full year revenue expectations. In terms of health care revenue and the second contribution from that part of the business for financial year '23, we expect that to be consistent with financial year '22. At this stage, that's just based on the minimum revenues under the Eisai agreement. We're targeting EBITDA in the range of 27% to 29% of revenue and targeting EBIT at 20% to 24% of revenue. But based on those revenue expectations at the moment, we're sort of guiding towards the bottom end of that 20% to 24% range. Again, if we see revenue increase through the year, which is a distinct possibility, then we would expect for that EBIT range to move up or our expectations to move up within that range. We're guiding for operating cash flow at 75% of EBITDA. But really, what that represents is the fact that we're rolling off revenue under the Eisai agreement, which includes the amortization of the upfront payment that was received in December of 2020. So a little bit of a mismatch there between revenue recognition and cash flow that as we say, cash flow approximately 75% of EBITDA. With that, I'm going to open up the lines to questions. [Operator Instructions].

Thanks so much, Brad and Darren, we do have several questions here. I'll go ahead and dive in. So as you were describing the upcoming readout of lecanemab, has Eisai started exploring more imminent options for Alzheimer's screening given this read-through coming out?

Look, so the ongoing discussion, obviously, the time line around the readout has been well flagged. So it's come in a little bit the time line from that previously said before '22, they've got to little bit more specific and say the end of September '22. But largely speaking, it's been tracking along with their expectations for some time, and there's been public, expressed for some time. So I would suggest the conversations and the discussions around product launch and product advancement, continuing in line with our previous discussions. But obviously, there's a huge amount of excitement about this impending data readout. And like everybody, we just wait for the opening of that package.

So in the same line of thought, so a large percentage of the contracts for Cogstate are in Alzheimer's disease. So what other indications offer opportunities for Cogstate and are being pursued?

Yes, it's a good question. So through financial year '23, we've highlighted three different disease areas that we're really going to focus on. So one, obviously, is Alzheimer's disease. The second is in Parkinson's disease, where we see pickup in R&D activity. And we think we've got a really compelling offering in that disease area. And the third is a broad category, I suppose, but called rare diseases where we're seeing a lot of increase in R&D spend around those rare diseases. And again, we think we have a particularly good offering our group there, led by Dr. Pam Ventola, who joined us a number of years ago out of the Child Study Center at Yale University, really well renowned scientists in the field of rare disease, particularly in pediatric indications and you'll appreciate that in a lot of these rare diseases, life expectancy is impacted. And so a lot of their studies are conducted in child populations. And so we have a really strong offering there and expecting to see good growth again, as we've seen over a number of years in those rare diseases as well.

Thanks, Brad. We have a raised hand from [ Dennis Hume ].

So in regard to the guidance for the revenue backlog runoff for FY '23, that's $29.7 million. The $4 million of revenue that we talked about that's been pushed back. Is that already taken into account in that $29.7 million of guidance? Or is that an additional change?

No, no, that's taken into account in respect of that guidance.

Next question that we have, a couple of questions around channel partnerships. I'll groups together. So the first is, are there -- can you provide any timing on new channel partner announcements? And then also what comes next with our current partnership with Clario?

So look, I think perhaps in context in relation to those channel partners before answering those specific questions. So companies like Clario and other companies we're working with, which have broader technology providers into the Clinical Trial space are really looking to expand their offering into central nervous system diseases such as Alzheimer's disease or Parkinson's disease and other associated central nervous system elements. In order for them to do that, they need access to digital cognitive assessments, but also access to scientific support to be able to deliver the appropriate assessments in those trials. And so that's where Cogstate sits as a really important strategic provider to these companies. So there's a number of companies that fall into this category. I'm not at this stage going to go into naming those. But if you want to do your research around different what we call eCOA providers, you'd be able to work that out. And we're in discussions with a number of those companies. In fact, we're bidding in conjunction with one of those companies for additional work. So we see that as a really important growth channel for us. In terms of announcing those partnerships, it will really depend on the marketing teams within those companies, the announcement we put out in conjunction with Clario a few months ago, it was really at the instigation of their marketing team, and we were happy to support their messaging in respect of that as they sought to, I suppose, make the industry aware of their improved offering in that space. In terms of how the relationship with Clario is going, it's going very well. We're continuing to bid on new work included in the $16.5 million of contracts signed and July and August include a couple of contracts in conjunction with Clario. We have a number of -- I think there's another 4 clinical trials that have been awarded but not yet contracted in conjunction with Clario. So the relationship is going and going really well, and we're seeing good adoption of that partnership.

Wonderful. Thanks, Brad. Moving into a different subject matter, can you give some color around competitive dynamics? On what basis do you compete and have you needed to change your approach?

Yes. So look, in the clinical trial space, major competitors there include Signant Health as well as the MedAvante-ProPhase offering that falls under the broader company banner, WCG, which is a group that provides a range of services into clinical trials. They are the major competitors we see in the clinical trial space. The competitive environment there has remained reasonably constant over the recent years. And we continue to compete with them as we have over prior years. I think we differentiate ourselves from those competitive in respect of our digital offering. Those competitors are really offering more of the support of traditional neuro psych assessments. If we look more at the digital providers, people like Cambridge Cognition or some of those other digital providers of cognitive assessments, really, we're seeing those as competitors more in the Healthcare space than in the Clinical Trials space. We're not seeing those types of companies when we're bidding on Phase II and III Alzheimer's disease studies.