Company Overview: Cogstate Ltd (ASX: CGS) is a neuroscience technology company, which is engaged in boosting brain health evaluations to improve the growth of new medicines and to facilitate earlier clinical understandings in healthcare. The company is engaged in offering reliable, fast, and responsive computerised cognitive tests across several domains. The company operates in three business verticals namely, Clinical trials, Research, and Healthcare.

CGS Details

CGS Rides on Strategic Investments & License Agreements: Cogstate Ltd (ASX: CGS) is a cognitive science company, which provides computerised cognitive tests for clinical trials, academic research, healthcare, and brain injury applications primarily in Australia, United States, and Europe. The company remains on track to benefit from the massive rise in Clinical trials sales contract. This aided CGS to deliver robust results in 1HFY21. Despite the uncertainties caused by COVID-19 pandemic, the company’s clinical sales contracts implemented in 1HFY21 came in at US$22.6m, slightly down from US$26.9 million reported in the pcp. Adding to the positives, the company’s name was also added as a preferred partner for ERT, the global leader in clinical endpoint data collection. This, in turn, will deploy CGS’s computerised cognitive assessments in Clinical trials on ERT’s technology platform, thus gaining additional sources of revenues.

In August 2019, the company inked a deal with Eisai Co., Ltd., (Eisai), a pharmaceutical company. Per the deal, Eisai will distribute and market Cogstate technology in Japanese markets. The arrangement, however, doesn’t incorporate the distribution of clinical trials, where CGS’s will continue to market its offering separately. Further, in October 2020, CGS informed the market regarding its expanded partnership with Eisai, per which the latter will market Cogstate technology as digital cognitive assessment tools to corporations, physicians, municipalities and directly to customers. Under the license agreement, CGS received a US$15 million upfront license from Eisai in the second quarter of FY21 and will pay royalties of a minimum US$10 million in a time frame of one to five years. This expanded partnership with Eisai is a significant step for Cogstate, to become a global leader in providing digital cognition testing solutions. 

The company delivered robust 1HFY21, under an extremely uncertain environment. Notably, the value of the latest contracts signed by the company has surpassed revenue realised in each of the last six successive quarters. This, in turn, resulted the company to witness a new record in Clinical Trials revenue backlog of US$49.7 million in 1HFY21.

Sales Contracts (Source: Company Reports)

1HFY21 Key Highlights: During the period, the company reported total revenues of US$13.9 million, up by 59% year over year. Over the last 15 years, the maximum portion of the company’s revenues came from the sale of technology and related services to pharmaceutical and biotechnology companies. Profit before tax for the period stood at a negative US$0.4million, against a negative US$3.9 million reported in the year-ago period. Net loss after tax for the period improved 89% year over year to US$0.4 million in 1HFY21. Loss per share came in at US 0.3 cents, an improvement of 83% from the period corresponding period.

Coming to the segmental details, revenues from Clinical Trials stood at US$12.6 million, up by 52% on pcp, owing to a massive rise in Clinical Sales contracts over the period of 18 months. Under the Healthcare segment, the company inked a partnership deal with Eisai, who will entirely distribute Cogstate technology globally. Revenues from the healthcare segment stood at ~US$1.5 million, up a whopping 245% on a year over year basis. Revenues from the Research segment decreased by 5% on year over year basis in 1HFY21 and came in at ~US$0.129 million.

Key Results Highlights (Source: Company Reports)

3Q21 to Date Business Update: Recently, the company informed the market regarding its clinical trials sales contracts implemented in 3Q21 to date, which stood at US$10.7 million. This, in turn, took the total value of sales contracts implemented in FY21 year-to-date to US$33.3 million.

Top 10 Shareholders: The top 10 shareholders together form around 83.29% of the total shareholdings, while the top 4 constitutes the maximum holding. Australian Ethical Investment Ltd.  is the entity holding maximum shares in the company at 17.32%. Dolby (Dagmar) is the second-largest shareholder, with a holding of 15.17%, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group  

Key Metrics & Decent Liquidity Position: At the end of 1HFY21, the company’s cash balance stood at US$21.3 million, with total debt amounting to ~US$4.97 million. Operating cash inflow in 1HFY21 came in at US$13.2 million, as compared to an outflow of US$1.2 million in 1HFY20. Operating cash profited during the period, primarily due to upfront royalty payment from Eisai. Notably, the company saw net proceeds of US$13.8 million from this upfront payment, after accounting for direct advisory costs and withholding tax levied in Japan of 5%.

In FY20, the company had an EBITDA margin of 0.7%, as compared to the industry median of -9.1%, representing decent fundamentals. Gross margin in FY20 stood at 42.7%, higher than the industry median figure of 29.4%. Current ratio in FY20 stood at 1.22x, as compared to FY19 figures of 1.05x. 

Key Risks: The company is exposed to foreign currency risk and interest rate risk. Further, lower investment in generating working capital requirement exposes the company to liquidity risk. The company also increased investment in R&D, to achieve its growth plan, which might weigh on margins, going forward. Also, stiff competition from peers remains a potential concern. Further, the ongoing COVID-19 led uncertainties are expected to create a higher degree of uncertainty, especially in regard to Clinical Trials revenue. 

Outlook: The company has witnessed a rise in future contracted revenues of 96% on pcp, which came in at US$74.8 million, owing to the implementation of the global license agreement with Eisai. Out of this, the company expects around US$12.2 million to be recognised in 2HFY21. Further, the company expects profit before tax in FY21 to be positive, owing to new and ongoing Clinical Trials revenue in 2H21, which is not likely to be impacted by COVID-19 induced uncertainties. In 2HFY21, the company expects to witness continuing commercialisation activity with Eisai in Japan and pre-introduction activity in the USA and Asia. For 2HFY21, the company expects to witness a contribution of royalties from Eisai Global (ex-Japan) of US$2.06 million. With enhanced capabilities, the company is likely to provide long-term growth opportunities to both its existing and new clients in Japan, the USA, and Asian markets.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Currently, the stock is trading slightly above the average of its 52-week’s high and low level of $1.47 and $0.29, respectively. The stock of the company went down by ~3.4% in the past three months. On a technical analysis front, the stock has a support level of ~$0.865 and a resistance level of ~$1.179. We have valued the stock using an EV/sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight discount as compared to its peer average, considering an increased investment in R&D, foreign currency fluctuation risk and COVID-19 led uncertainties in regard to clinical trials revenue. For the purpose, we have taken the peer group - Telix Pharmaceuticals Ltd (ASX: TLX), Probiotec Ltd (ASX: PBP), to name a few. Considering strong financial performance, decent liquidity position, expanded partnership with Eisai, upfront license fees, valuation and decent long-term outlook, we recommend a “Buy” rating on the stock at the current market price of $0.99, down by ~1.493% as on 10 March 2021.

CGS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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