Cogstate Limited (CGS) Earnings Call Transcript & Summary

Since the inception of Cogstate in 1999, our investment thesis has been focused on an aging population and increasing incidence of Alzheimer's disease and other dementia-related diseases, and the need to provide technology solutions that simplify the measurement of cognition, patients, their doctors and researchers developing new and better therapies. Throughout that journey, we've remained steadfast in our belief that eventually treatment options for Alzheimer's disease would come to market. And when they did, Cogstate would be ready with technology solutions that make cognitive assessment easy and accessible so that the right patients at the right time can access the right treatments. We want to make the measurement of cognition as simple standardized, actionable and common as the measurement of blood pressure. We believe that we are successful in achieving that, we will have improved brain health around the globe. Today, our business has 3 segments with 2 major commercial focus areas. In our Clinical Trials business, Cogstate supports pharmaceutical companies who are seeking to bring new therapeutic treatments to market. Today, approximately 90% of our revenue is derived from the Clinical Trials segment, where Cogstate provides a range of services as well as our proprietary digital assessments of proposition. Our Health Care business references that original investment thesis of providing technology to help doctors assess the cognition of their patients and is now extended to providing digital cognitive assessments directly to individuals. In this area, we've partnered with Japanese pharmaceutical company, Eisai, to commercialize our technology. I'll provide more detail in respect of that agreement shortly. In addition to our 2 commercial segments, we worked extensively with academic collaborators around the world, where our technology supports their scientific ambitions and we benefit from the access to data and insights and the scientific validation that comes from their peer review of recent. At our 2020 AGM, we were very pleased to be able to announce a global licensing agreement with Japanese pharma company, Eisai or Cogstate technology in all markets outside clinical trials. The global license followed a Japan regional license with Cogstate technology to Eisai that was executed in August 2019. Eisai has a long and proud history in Alzheimer's disease that dates back to the launch of the drug, Aricept in 1997 for the symptomatic treatment of mild to moderate Alzheimer's disease. And today, they have a promising multifaceted drug development pipeline aimed at preventing and curing the disease. The global agreement between Eisai and Cogstate provides Cogstate with the certainty of cash flows, limited cost downside and significant upside with an ongoing royalty from the sale of Cogstate technology. The 10-year term of the license provides us with many options over the longer term. Hopes for commercial success from our engagement with Eisai have been enhanced by the release of Eisai's positive trial data. Approximately 6 weeks ago, Eisai announced its confirmatory Phase III Clarity Alzheimer's disease study of experiment of their experimental therapy, lecanemab, that have met its primary endpoint, showing a statistically significant reduction, cognitive decline in a global study of 1,795 patients with early Alzheimer's disease. The positive result from the lecanemab Phase III trials after almost 25 years since Aricept's launch is an important milestone for Eisai, but also a very important step for the scientific community and for all of Alzheimer's disease patients and their families. If approved, lecanemab can potentially slow the progression of Alzheimer's disease and provide a clinically meaningful impact on cognition and function. Cogstate and others eagerly await the release of further data from Eisai's Clarity AD trial at the upcoming clinical trials in Alzheimer's Disease Conference that will be held in San Francisco end of this month. As an industry, we're also eagerly awaiting top line data from other ongoing Phase III trials. Roche is expected to release their Phase III data before the end of this calendar year. And Eli Lilly is expected to release top line data from their ongoing Phase III state in mid calendar 2023. Earlier this week, on Tuesday, the 1st of November, in the quarterly earnings call, management from Lilly referenced the Eisai Phase III data and noted and I quote that these data certainly reinforces our confidence in donanemab and the forthcoming readout from our Phase III study. Team at Cogstate is also encouraged by Eisai's positive Phase III data implications for other Phase III trials. Given such positive data, it's possible that there will be multiple Alzheimer's therapies on market within the next 12 to 24 months. And I make that statement aware that there's always some risk in attempting to predict how the regulators and the payers will interpret the data from clinical trials, but with the confidence in the quality of the data that's being collected. Alzheimer's treatments on market and wireless are accessible and expected to positively impact both Cogstate's Commercial business segments. Firstly, the release and reimbursement of the first Alzheimer's treatment is expected to lead to substantial increase in Alzheimer's disease R&D, which provides a growing market into which Cogstate can sell our technology and services. While the top line data from Eisai's Clarity AD trial showed a 27% decline slowing in cognitive decline, it's not a cure for Alzheimer’s disease. With further investment, new and better therapeutic treatments can be expected over the next 10 to 20 years. In other areas of medicine, it's been seen that an initial breakthrough can lead to progressively improved treatment options, patients, and all of those improved treatments must complete the same clinical trials processes. Therefore, over the next 10 to 20 years, we expect the market for cognitive assessment in trials of central nervous system disease therapeutics to grow. Over that time, Cogstate will seek to grow market share in that growing market. Secondly, the availability of an effective treatment for early Alzheimer's disease is expected to increase demand for cognitive assessment in the community and in physicians' offices. Through our agreement with Eisai, Cogstate is well placed to commercialize our technology. As we reported at the end of August, FY '22 was another record-breaking financial year for Cogstate, the value of clinical trials, sales contracts executed, the revenue generated and profit were all records. On that strong financial foundation, we'll seek to grow our business at a time when the market for our services is expanding. I want to acknowledge the hard work of our team led by Brad that has led us to this enviable position. And I also want to thank Patient Capital that's allowed the management team the time to build a quality business. I'm now going to hand over to our CEO, Brad O'Connor so that he can update you in respect of the short- and longer-term prospects for the business. Brad?

Thanks, Marty. Thank you, everyone, for coming. Nice to see some familiar faces. I'm followed with about 40 people online. So which is the new way of doing things, of course, we've got a handful of people here in person, got a whole bunch of people online. So anyway, thank you for your attendance. Today, the number of external factors has given us a great level of confidence that Cogstate is well positioned to generate revenue growth in the future. Firstly, central tenet of Cogstate investment thesis is that the launch of Alzheimer's therapies will create demand for cognitive assessment in the community. Cogstate technology is scientifically proven to be able to identify very early signs of cognitive impairment that might be associated with Alzheimer's disease, and therefore, our tests are really well placed to meet that demand. Additionally, we expect that the approval of the first Alzheimer's disease-modifying therapies will create a path to market for future therapies and thereby will lead to an increase in the overall R&D expenditure focused on this terrible disease. Secondly, the increased adoption of decentralized trial designs, where testing is conducted at home is providing Cogstate with increased sales opportunities. Cogstate has been able to expand our service offering to meet the demand for decentralized clinical trials with telehealth style assessments, thereby increasing the average value of those sales contracts with Cogstate. And, of course, Cogstate's digital assessments are really well suited and proven to be effective for remote and even self-administered assessment in people's homes. Finally, our channel partner strategy, which is focused on both technology platforms through electronic data collection and also the contract research organizations that are running clinical trials is generating increasing sales opportunities, and as we've stated earlier, providing opportunities for expansion beyond Alzheimer’s disease trial programs. Looking at the September quarter clinical trial sales contracts, we can see evidence of that positive macro forces that are impacting our business. Our sales contracts executed during the September quarter was $17.9 million, which was our third strongest sales quarter ever. Alzheimer's disease research, again a really important factor in our commercial success, making up 89% of the value of sales contracts executed with the total value of sales contracts executed was down on the -- compared to the same quarter last year, it's important to remember that, that September quarter last year included one really large Phase III Alzheimer’s study. The positive Clinical Trials sales results took our contracted revenue backlog up over USD 148 million as of the end of September, which is another record for us. Clinical Trials contracted future revenue was over $110 million, which was up 26% on the same time last year and up over 162% on this time 2 years ago. Despite strong sales results and the record contracted future revenue, September quarter revenue was down compared to recent quarters. In a couple of large Alzheimer's trials, the pharmaceutic companies that are running those studies are dealing with slower than forecast enrollment of patients. The slow enrollment is unrelated to anything that Cogstate is doing, unrelated to activities, but relates to issues of both identification of those patients and also supply chain issues relating to the availability of certain biological test that necessarily involve those patients. The slower enrollment has meant that Cogstate is performing in our assessments at a slower rate than we expected. And therefore, our revenue recognition has been slower than forecast at the beginning of those studies. I think it's really important to note that there's no risk that these trials will be canceled. They're continuing to enroll patients, but just at a slower rate than they expect. This is a timing issue only and the revenue will be recognized as the cognitive assessments are performed. We've seen acceleration in enrollment over the last couple of months and the pharmaceutical companies involved are confident that they will continue to accelerate involvement over the coming period. While the revenue delays are impacting the first half FY '23 results, the analysis of contracted future revenue for fiscal '24 and fiscal '25 indicates significant revenue growth in those coming years. Contracted revenue for the next financial year is 17% higher than it was at this same time last year, and contracted revenues in year 3, in this case is FY '25, is up 77% compared to the same time last year. If we separate out the Clinical Trials contracted revenue from the Healthcare contracted revenue, we see the Clinical Trials revenue of $28.2 million for fiscal '25 is up 100% from the same time last year. The contracted revenue for '24 and '25 provides a really strong springboard for future growth as the market expands for our services, particularly Alzheimer's trials. So I want to spend some time now talking to the recent data points to support our view of the growing market for Cogstate services. For some time now, we've stated that we expect to see the market for trials in Alzheimer's disease and more generally in central nervous system indications will grow substantially in the coming years. Today, we're really happy to report that following the release of the positive data from Eisai, we're already seeing the first shoots of that new growth. Our largest customers are already planning expansion of their existing Alzheimer's clinical trials programs and therefore, we expect that we will be able to execute additional sales contracts to further support those ongoing programs during the current financial year. Currently, Cogstate is working with customers developing monoclonal antibodies to lower amyloid in early Alzheimer's disease with delivery of those drugs via infusion. Those same customers are now planning trials that will seek to provide for subcutaneous injection as an easier delivery model than infusion. In addition, our customers are planning to run trials to determine what happens when their patients come off drug and whether a maintenance regimen will be required in the future once the patients come off drug. All of those studies and additional studies I'm talking about are in their early Alzheimer's disease population. But in addition to that, in the trials that are ongoing in the pre-clinical Alzheimer’s population, the companies will not only seek to explore subcutaneous injection, but they are also planning to expand the ongoing studies geographically to help speed up recruitment. All of this additional work is expected to result in additional sales contracts to Cogstate and therefore, additional revenue. Away from Alzheimer's disease, we continue to expand our offering to gain further reach through our channel partner strategy. Mood disorders, such as major depressive disorder, are an area where we're seeing growing interest for Cogstate services from our contract research and technology platform channel partners. In a step that takes us closer to a broader support of mood disorder trial solutions, Cogstate has been awarded a new project in a Phase II major depressive disorder trial. Separately, our cognitive testing technology solutions are being sought after in new configurations and new deployment modalities. The digital innovation group within one large pharmaceutical company has engaged Cogstate in a multi-study research collaboration, using Cogstate digital assessments via remote web-based assessment to monitor thousands of healthy adults with the aim of establishing a self-administered early dementia screening system for identification of patients for a number of clinical trials that they're planning. From a scientific perspective, in July, we had a really strong participation in the annual Alzheimer’s Association International Conference, which was held in San Diego with 23 scientific presentations from Cogstate and meetings with over 20 different customers. Looking forward, we'll have a similarly strong presence and participation of the upcoming Clinical Trials in Alzheimer's Disease Conference in San Francisco that starts on the 29th of November. So turning our attention to the expected financial results for this '23 financial year. We see 2 contrasting events or forces that are impacting our expectations. So firstly, our first half revenue and profit are expected to be impacted by slower than forecast enrollment of patients in a couple of large Alzheimer's trials, which will cause delays to revenue. However, over recent weeks, we've become even more confident in respect to Clinical Trials sales that were expected to positively impact both revenue and profitability in the second half of fiscal '23. Therefore, whilst anticipating first half '23 Clinical Trials revenue will decrease 10% to 12% from the second half '22 result, we expect a stronger result in the second half of the financial year. As the second half revenue will be significantly impacted by the sales contracts will be, in fact, executed between today and 30 June, we're unable to provide specific revenue guidance for the second half at this time. Given a decrease in revenue, the margins for the Clinical Trials segment are expected to be lower for the first half of '23, as we resource the expected increase in trial activity that we expect is coming in the coming months. We expect the clinical trials margin for the first half of the year will be in the range of 48% to 51% compared to 57% compared to previous half year. As a result, half year profit for the group will be negatively impacted, but we anticipate a strong profit result in the second half of the financial year on the basis of the expected increase in clinical trial sales and associated increase in clinical trials revenue. So all in all, we continue to target fiscal '23 EBITDA in the range of 27% to 29% of revenue. Group '23 EBIT based on current revenue forecast is expected to be at bottom end in the range of the 20% to 24% of revenue. Again, the actual result will vary with the level of sales contracts executed between now and 30 June. We remain confident that short-term revenue delays will be resolved in the normal course of operations. And therefore, as a business and as executive team, we're more focused on the increased trial activity that we expect following the positive Phase III data from Eisai and the impact of that increased activity on the financial performance of Cogstate through the second half of '23, but probably more importantly, into fiscal '24 and beyond. So in summary, as we stand here today, Cogstate is really well positioned for growth. Our disruptive digital assessments are clinically validated and accepted by regulators with the adoption of decentralized trial design over recent years, the market for well-validated digital assessments has grown as pharma companies and regulators both seek to ensure that the assessments that they're using in their trials are well suited to the environment in which they are delivered. Cogstate has significant leverage to the breakthroughs in Alzheimer's disease treatment that are expected to be available to patients in the near future. We expect to see an increase in the level of Alzheimer's disease R&D expenditure, which is positive for our Clinical Trials business. And of course, the partnership with Eisai provides much upside beyond the contracted minimum payments as new Alzheimer's treatment results in a growing need for ease of access to accurate and reliable assessment of cognition. Cogstate has developed channel partnerships with a number of contract research organizations and other technology providers to the clinical trials market. These channel partners rely on Cogstate to provide complementary specialized services and solutions for optimized clinical outcome assessment, as well as to help inform their technology and service roadmap as they refine their solutions for greater penetration into central nervous system disease trials. The channel strategy is beginning to prove to be a source of new sales opportunities for us, and growth both opportunities and awarded contracts, giving Cogstate more shots on goal. Of course, we're in a really strong financial position with over $148 million of contracted future revenue, over $30 million of net cash, we are a profitable cash flow positive business at a time when debt and capital markets are negatively impacting many other businesses, of course. And so while we're experiencing some short-term issues associated with revenue recognition, we do expect those issues to resolve through the second half of '23. To conclude, I want to echo Marty's earlier comments and thank -- take the opportunity to thank shareholders for your patience. We've awaited for many years for therapeutic treatments to come to market. I'm confident that those treatment options would create demand for large scale brain health assessments and that's where we find ourselves today. We feel confident we have successfully secured the commercial opportunities that will create long-term returns for our shareholders. So again, thank you for your patience. It's a really exciting time. I'm going to hand back to Marty now, and we'll happily take questions.