Company Overview: Cogstate Ltd (ASX: CGS) is engaged in improving brain health evaluations to improve the growth of new medicines and to accelerate 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

Partnership Synergies & Decent Liquidity Position Aids CGS: Cogstate Ltd (ASX: CGS) is engaged in providing computerised cognitive tests for clinical trials, academic research, healthcare, and brain injury applications primarily in Australia, United States, and Europe. Despite the uncertainties caused by COVID-19 pandemic, the company’s clinical sales contracts implemented in 3QFY21 came in at US$13.3 million, depicting an increase of ~24% from the prior corresponding period. The company remained on track to further execute sales contracts with existing customers in addition to first-time contracts with numerous new customers. On 23 July 2020, the company partnered with ERT, a clinical endpoint data collection company. During 3QFY21, the company won a new contract through a partnership agreement to mutually endorse a key pharmaceutical sponsor with a global Phase 2 clinical trial of a candidate therapeutic for the cure of autoimmune disease. These partnerships are expected to aid the company to bolster its advance additional opportunities to jointly support new clinical trials customers through a wide array of therapeutic indication. This, in turn, is expected to garner additional sources of revenues, going forward.

On 26 October 2020, the company informed the market regarding its exclusive world-wide licensing deal with pharmaceutical company 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.

As at 31 March 21, total contracted future revenue came in at US$79.7 million, up from US$74.8 million reported at the end of 31 December 2020 and US$42.1 million from the year-ago period. The contracted future revenue figure offers better vision for the company’s future revenue performance. The company anticipates entering FY22 with a record level of contracted revenue, given its increased activity in Clinical Trials with a gradual shift to remote and digital assessments. This, in turn, aided the company to drive its further growth in the backlog of clinical trials contracted future revenue to a record of US$55.7 million as at 31 March 2021. The graph below depicts the contracted future revenue as at March 2021 quarter and the end of each 1H period since June 2017.

Future Trends (Source: Company Reports)

3QFY21 Key Highlights: During the period, the company reported total revenues of US$8.83 million, up by 39.6% year over year. FY21 year-to-date revenues came in at $22.7 million, depicting an increase of 51% year over year. The company recorded a profit before tax during the quarter and anticipates reporting the same for FY21. Robust Clinical Trials activity and cost management implementation are aiding improved margins. Sales contract executed during the quarter came in at US$13.3 million, up 24.2% year over year. Contracted future revenues increased ~89.3% year over year in 3QFY21.

Coming to the segmental details, revenues from Clinical Trials stood at US$7.26 million, up by 26.4% on pcp. Notably, AD investment is driving Clinical Trials revenue growth. Revenue backlog in Clinical Trials as at 31 March 2021 stood at US$55.7 million. Revenues from the Healthcare segment stood at ~US$1.51 million, up a whopping 216.9% on a year over year basis. Revenue backlog in healthcare as at 31 March 2021 stood at US$24 million. Revenues from the Research segment decreased by 45.8% on year over year basis in 3QY21 and came in at ~US$0.06 million.

Key Results Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 82.38% 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 3QFY21, the company’s net cash balance stood at US$17.6 million, up from US$7.1 million reported at the end of 3QFY20. Net operating cash outflow in 3QFY21 came in at US$1.3 million. Total receivables at the end of 3QFY21 came in at US$7.5 million. up 2.7% year over year.  Operating cash inflow came in at US$11.9 million, in the YTD period. Operating cash profited during the period, primarily due to upfront royalty payment from Eisai (net US$13.8m). At the end of 1HFY21, the company’s cash balance stood at US$21.3 million, with total debt amounted to ~US$4.97 million.

In 1HFY21, gross margins came in at 47.1%, higher than the year-ago figure of 29.2%. EBITDA margins and operating margins came in at 6%, and -2.8%, better than the year-ago figure of -35% and -44.3%, respectively. In FY20, the company had an EBITDA margin of 0.7%, as compared to the industry median of -3.7%, representing decent fundamentals. Gross margins in FY20 stood at 42.7%, higher than the industry median figure of 31.2%. Current ratio in FY20 stood at 1.22x, as compared to FY19 figures of 1.05x.

Profitability and liquidity Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group

Key Risks: On the flip side, the company is exposed to stiff competition from peers, and the global threat environment. The company’s business, financial and operating conditions highly depends on general economic conditions and spending powers of customers. If such circumstances worsen, it may negatively impact the overall financial performance of the company. The company’s financial instruments comprise mainly of receivables, payables, bank loans and overdrafts, finance leases, loans from related parties, cash, and short-term deposits. This exposes TLX to various risks such as foreign currency risk, interest rate risk, liquidity risk and credit risk. Further, the ongoing COVID-19 led uncertainties are expected to create a higher degree of uncertainty, especially in regard to Clinical Trials revenue.

Outlook: Looking forward, the company expects a robust sales pipeline in 4QFY21. CGS remains focused on bolstering its market reach via additional channel partners and prospects to widen it reach into clinical trials for a range of diseases. 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. The company remains on track to gain from the partnership with Eisai and is dedicated on the growth opportunity that the Healthcare market offers. For 2HFY21, the company expects to witness a contribution of royalties from Eisai Global (ex-Japan) of US$2.1 million, with US$1.1m of this in 4QFY21. Further, the company is working closely to introduce a possible disease reducing therapy for Alzheimer, with numerous late-stage potential candidates, as the community is now more focused on brain health. The company remains on track to offer long-term growth opportunities to both its existing and new clients globally, given its enhanced capabilities.

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 $0.295, respectively. The stock of the company went down by ~8.2% in the past six months. 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 median, 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 - Mayne Pharma Group Ltd (ASX: MYX), Probiotec Ltd (ASX: PBP), to name a few. Considering decent liquidity position, increase in top line in 3QFY21, expanded partnership with Eisai, upfront license fees, positive outlook, and valuation, we recommend a “Buy” rating on the stock at the current market price of $0.88, as on 12 May 2021.

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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