Summary: Cogstate makes computerized cognition tests which are used mostly by pharma

companies to do clinical trials for Alzheimer’s disease. They are the leader in the digital
cognition tests which are the most accessible and easiest cognition tests. The business
demonstrated operating leverage when EBIT margins increased to ~24% in fiscal 2022.
Continued clinical trial volumes or approval of an Alzheimer’s drug can substantially increase
demand for its tests. Downside is if the pharma companies decrease their effort to develop a drug
for Alzheimer’s disease.

Business: Cogstate develops digital versions of cognitive tests which evaluate for cognition
deterioration. Their tests replace paper and pencil tests administered by neuropsychologists.
Cogstate’s tests can be done remotely so the subject and the psychologist do not need to meet
physically. This trend of moving testing to home is helping Cogstate's tests. They use the term
decentralized nature of testing in their reports. Cogstate’s tests are simple standardized test using
images which can be administered globally with little variation because of different languages.

History: Cogstate’s scientists while working with Australian indigenous communities in 1999
discovered that cognition assessments were limited by language and cultural contexts. So they
developed cognitive tests free of language and cultural contexts. Their product didn't make any
money for several years in 2000s. Primary Care Physicians felt no need to test cognition because
there was no drug to treat it. Cogstate changed to help Alzheimer's drug discovery companies do
clinical trials and they started making money. Now 90% of their revenues are from clinical trials
for Alzheimer’s drugs. 

They make money by selling the tech and tests to pharma and biotech companies which use  the
tests in clinical trials for Alzheimer's disease. The business helps with study, design and
statistical analysis of the trial results. This business is like providing picks and shovels for
clinical trials for Alzheimer's disease. Cogstate’s tests have been used in over a thousand
academic studies and dozens of late-stage clinical trials. They are by far the largest and most
validated computerized cognitive test in the world. Eli Lilly has likely invested the most money
in Alzheimer’s research and uses Cogstate’s test for their Alzheimer’s trials. In addition to the
clinical trials, they have tests like Cognigram which help in the detection of cognitive
decline. This is DTC (Direct to consumer version) of their tests. They signed a licensing
agreement with the Eisai which launched Cogstate's Technology preinstalled on smartphones in
Japan.

Customer Value: They are the leader in tests done digitally. It takes 7-10 years for a test to be
finalized, validated, supported by studies and then be ready for pharma companies to use.
Hundreds of free tests are around but they are not validated. Big pharma companies are risk
averse and would not want to use a test which has not been validated. Pharma companies can
spend $500 mill + on clinical trials and would not want to save money on cognition testing
which can potentially impair the validity of their trials.

Competition: Cambridge Cognition has validated tests. Cogstate does not see Cambridge
compete with them because Cambridge didn’t invest in the infrastructure related to tests like
quality assurance, processes and telehealth assessments by neuropsychologists. Cambridge has
$14 mill revenues versus $40+ mill revenues at Cogstate. US competitors are Signet health PE
owned and Metabolic prophase owned by WCG group. They have the services and infrastructure
but don’t have their own tests. They use standard neuro-psyh tests. Cogstate's test are no better
than the standard tests. The standard tests rely on doctors, are not easy to use or scalable.
Cogstate's tests are in 27 countries and 40 languages. Cogstate’s tests are being used in 17% of
the clinical trials. Bill Gates, whose father died of Alzheimer’s diseases, pointed to Cogstate’s
tests as accessible and easy to use diagnostic test for Alzheimer’s disease on his gatesnotes blog.

Lumpy revenues? Cogstate had a record fiscal 2022 ending in June 2022 with revenues of $45
mill and EBT of $10.7 mill. That year showed the operating leverage in the business. Many trials
are happening. If any drug is approved, it will derisk their business such that more testing will
need to be done around that drug, competition, consumption etc. The simpler, digital and low
cost nature of their tests have helped them gain market share. In addition market for cognition
testing is growing.  2023 revenues are expected to be lower than 2022 from delays in clinical
trials.

Industry trends: More Alzheimer's disease drugs are in phase 3.  Eisai and Lily have phase 3
drugs. Cogstate bookings depend on the clinical trials done by pharma companies to develop a
drug for Alzheimer's disease.

Margins: Clinical trials business gross margin is about 60% That's quite high. Someone else
who's working in this industry and provides technology tries to get to 45% margin but they are at
60%. On the software, margin is in the 90s. For services, margins vary. For things like project
management and data management and those kinds of services, they look to run at about 50%
margin on those. One of the things happened with the pandemic is there's a lot more remote
kinds of assessments so telehealth style assessments even in the context of clinical trials. They
have a global network of about 200 neuropsychologists. These are people who run their own
clinical practice, who work for Cogstate on a on a consulting basis. New product development is
a bit higher now. Profit before tax margin increased to ~25% in 2022 and can potentially
increase to 30% as they grow. 

Backlog of $140 mill. Company states that the timing of Alzheimer's disease trials are being
impacted by trial readouts and regulatory decisions for Eli Lilly and Eisai in June 2023.

Management announced A$13 share buyback and are repurchasing shares every week. Insidsers
have also bought stock recently. Large shareholders include David Dolby (15% owner), whom
Alzheimer’s Association International Conference gave its top philanthropic award in 2019.
Martyn Myer (14% owner) awarded Officer of the Order of Australia for his contribution to
medical research and establishment of Florey Neuroscience Institute. Eisai Co., one of the
biggest pharma companies in Alzheimer’s research owns ~7% of Cogstate.

Cash: It has ~$29 mill cash and no debt. In addition it has royalty cash flow stream from Eisai
for the DTC version of their test which is $16 mill up front and low double digit % of royalty
revenues. Minimum of $30 mill in such fees over ten years.
Valuation: Cogstate is priced at 16x EBIT and 4x 2022 sales. Revenues are lumpy from clinical
trials and fiscal 2023 revenues will be lower as company restructures to lower costs . However,
their tests have barrier to entry and backlog at $140 mill, one of the highest ever, will continue to
drive growth in 2024 and beyond.

Cogstate is priced at EV/Backlog of 1x.

Risk: Alzheimer drug read outs are not promising or drugs fail and the clinical trial volumes
decline. This happened once in 2017/2018.