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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, everyone. Thank you for joining Cogstate's Investor Update in respect to the June quarter and the 12 months ended June 30, 2022. My name is Brad O’Connor, I'm the CEO of Cogstate and joined today by Cogstate's CFO, Darren Watson.
Couple of housekeeping matters I note here, disclaimer in relation to the presentation of today's results. Also, just wanting to point out to people, there's a couple of different ways of interacting with us if you'd like to ask questions. We'll take questions at the end of the presentation. Firstly, if you want to ask a question, you can type your question in the control panel and that will be read out by the moderator. Alternatively, if you can raise your hand to have your line unmated, so you can ask your question personally.
Finally, I note this presentation has been lodged with the Australian stock exchange and also the slides are available under the handouts tab in this forum. And finally, I note that a recording of the presentation will be available from the Investor Center section of the Cogstate website, as soon as possible following the conclusion of today's presentation.
So let's get into it. A couple of background pieces to start with. Cogstate, since our inception in 1999, our investment base has been focused on an aging population, an increasing instance of Alzheimer's disease and the need to provide technology solutions that simplify the measurement of cognition for patients, their doctors, and the company developing new and better drug therapies. So put simply, we believe that brain health is important and brain health assessments should be easily available to everyone. Cogstate combines proven science and technology to make assessment of cognition as simple as the measurement of blood pressure.
Our business in a snapshot is developing really well. The company was founded in Melbourne, Australia, but we now have a large global presence. Our technology has been validated for more than 20 years, really well validated scientifically and commercially now. We sell our technology into two different markets. Our largest market is the clinical trials drug market, where our customer base is pharma and biotech companies who are seeking to develop new drugs. That's a really large market and represents about 90% of our revenue base currently.
The other part of our business is where we are seeking to have our technology used by primary care physicians and by consumers so that they can monitor either the health of their patients or their own brain health, and we think that's a really exciting opportunity for us.
To dig into the financial results now and some key highlights around that. So really successful financial year 2022 result. I should note that these preliminary results based on unaudited numbers and we will release our full-year audited financial results at the end of August, but just focusing on these numbers for a second. $45 million of revenue, obviously all numbers are in U.S. dollars. A really strong result, 38% growth from the prior year. We've been really pleased with the operating leverage that we've seen through the business and we've been able to control the cost base there. So we've seen an improvement in operating expense to revenue ratio, which is down from 38% in financial year 2021, so we're guiding a range of 30% to 31% of revenue now.
So really strong improvement there, that's led to substantial increase in EBIT margins, so we've updated the guidance there to that – our EBIT range when the 23% to 24% of revenue, which is in round dollar terms roughly about US$10.5 million of earnings before interest and tax. I think really pleasingly, really strong operating cash flow, $9.7 million operating cash inflow for the year, substantially exceeding guidance there. Our net cash up to $28.7 million or in total cash of just a bit over $30.5 million at the end of June, again, a substantial increase from where we were at this time last year.
So overall, really strong financial results and what we're going to do now is dig into those relatively quickly. So first, clinical trial sales contract. Again, just as a reminder, the way that Cogstate interacts with our pharmaceutical company customers as we sign a contract at the beginning of each trial that outlines the full scope of work and all the technology and services that we'll be delivering to those customers. So $82.5 million of the sales contracts executed financially for the 2022 financial year, that's up 74% from the $47 million of sales contracts executed last year.
So really strong growth represented by particularly strong growth in Alzheimer's disease, which represent – we note that 84% of financial year 2022 sales contracts for Alzheimer's disease. Should note that June quarter sales contracts of $8.8 million, obviously that quarter is less than the other three quarters through the financial year, no trend to talk to there. I think just the reality of 12 weekly reporting. We've seen some contracts that may have executed in the June quarter push into the September quarter. We expect to see a stronger September quarter results. So no long-term trend there, just the variability of 12 weekly reporting.
As we push into the revenue for the year, really – firstly noting the really strong June quarter revenue result, which is a record $12.6 million [indiscernible] a bit of a decline we've seen through the December and the March quarters. We've spoken about this previously, but we've seen some delays in revenue recognition related to issues with respect to patient enrollment, especially in one of our key Alzheimer's studies that has pushed revenue out into future periods. But we saw, as I say, there a really strong pickup in that June quarter. And if you look at on the right of screen there that trailing 12 months revenue, a really nice growth line in terms of that revenue profile.
If we look then at the contracted revenue backlog for the business, $139 million of the backlog at June 30, 2022, so 37% growth year-on-year from where we were this time last year. I do note there that we've seen a slight contraction from the balance as at the March 31 of this year. What that represents really is put simply is we've signed $8.8 million worth of contracts, so we’ve added $8.8 million into the top of the funnel, and then we've recognized $11.5 million of revenue. So we've recognized more revenue than contracts we've added. And so that's where we see that slight decline in that number.
Overall, really strong position in terms of our contractor revenue position as we look forward. If we break down that $140 million of revenue to look at how is that rolling off, you can see we've identified that each financial year where that expected revenue is expected to be recorded.
I'm going to hand to Darren now to talk through some of the elements of how those numbers are coming together. And particularly, the fact that we've seen in the FY2023 number of around $34 million of contracted revenue is pretty almost identical to the same – the figure we had at March 31. So Darren, do you want to talk through some of the issues we've been dealing with there with respect to that revenue recognition and the expected timing thereof.
Yes. Thanks, Brad. So of the $8.8 million of additional clinical trials sales contracts executed this quarter, just short of $4 million adds to the FY2023 financial revenue under contract. However, what we've seen is across a handful of studies. Those studies have been put on hold or delayed for a couple of key different reasons. The first one relates to some issues with the manufacturer of drugs. And so therefore, those studies are being put on hold, while those issues get resolved until that drug supply can start to flow.
We are expecting that that will be more of a short-term issue, but of course, we're not fully aware of that until the pharmaceutical company and the sponsor can solve those problems. So that backlog currently sits in FY2020 to FY2025, but certainly if that issue can be resolved, there is the chance of pulling that forward into the back half of FY2023.
And then the second issue is on a couple of trials. The FDA are reviewing the protocols of those trials and so patient enrollments have been put on hold across the USA and Canada. They are proceeding in a couple of other countries, but the large enrollments in the USA and Canada have been put on hold, while that review is complete. We are not in control of the timing of that. We are not aware of the timing of when that will be resolved. So again, that revenue shifted out into future years, but certainly to the extent that those issues with the FDA can be resolved early. There is a chance of that revenue being pulled back into FY2023.
So what we've roughly seen is, is $4 million added, but $4 million moved out, and we continue to work with sponsors and pharmaceutical companies to stay on top of when those issues will be resolved and look to pulling some of that revenue back into FY2023 should those issues be resolved in time.
Thanks, Darren. If we have a look at that contract of revenue position graphically and compare that June 30, 2022 number to the previous two financial years, what you can see there with the blue line shown on this graph is clearly substantial growth in the amount of contracted revenue. Just reflective of the comments that Darren's just made, we are seeing substantial growth over prior years is that revenue recognition expectations around certainly year two, but especially in years three and four. So you are seeing that substantial growth in the revenue profile, but it just points to what does that timing look like in terms of that revenue recognition. And so I think that's really important point to understand in terms of how does that $140 million or thereabouts of revenue roll off over time, and what does our revenue and what does our earnings profile look like from that.
We are going to pivot a little bit now and move beyond just the financial results that were reported and talk to some of the larger macro trends that are impacting our business. The first of those is breakthrough Alzheimer's treatments that we're expecting to come on to market, or it could come on to market, I should say. And some really important drug readouts that are happening over the course of the next 12 months, and obviously act as important catalyst for our business. So we won't talk too much about Biden and the troubles that they have had with respect to the Aduhelm drug and the launch of that drug that really focus on the upcoming Phase III data readouts from Eisai, Roche and Lilly.
So Eisai's Lecanemab is expected to readout their Phase III data towards the end of this year, probably the end of November is our expectations. Again, really important data readout for us both from our clinical trials business, but obviously with respect to our healthcare business, given our relationship with Eisai and our plans for that healthcare business, so that's expected in that as we say around November. Roche's Gantenerumab data expected quarter four of 2022, so again, towards the end of the year, and then Lilly's Donanemab data expected mid-2023. So the high level of expectation in relation to those data readout, particularly in relation to Eisai and Lilly's data readout, and that expectation has really built on the strong Phase II data that has been presented publicly, as well as the open-label extension data from that Phase II, that's shown increasing benefits for those patients the longer they stay on drugs.
So those are really exciting data readouts for us and this time next year, there is the chance that the Alzheimer's disease treatment market looks substantially different to what it looks like today in terms of understanding what pharma company activities are undertaking to, to get ready for the commercial success of a new therapy. What we've tried to do here is identify the types of activities that pharma companies will be undertaking. Whether that be Eisai, or Lilly or Roche or anybody else as they try and get the market ready to both identify patients who will benefit from that treatment to educate primary care and specialist care doctors as to how the – in respect of the data supporting that the efficacy and safety of that drug and how it should be handled from a prescription point of view.
Really the thing that we've highlighted there developing a plan to provide clinicians with – and doctors with access to diagnostic assessment tools, such as the Cogstate assessment, which is what we're really focused on with Eisai, and then all of their post launch activities. So a number of activities that you can expect to for pharma companies to undertake on the back of positive data. If we look forward and think about what could that mean and what sort of the impact would that have on our clinical trials business? I think it's fair to say that positive data will impact really positively on our clinical trials business. We would expect to see the initiation of a number of new studies on the back of positive clinical trial data.
I think this is a point that's important for investors to know because I often get a question of, but once they have positive data, doesn't that mean that everyone stops the conduct of new trials and nothing could be further from the truth. Our view is that a positive trial will actually result in an increase in the level of R&D investment within Alzheimer's disease research.
Changing gears a little bit, obviously one of the other trends that's impacting on our business is our agreement with Eisai. I'm not going to spend much time on this because I think most investors really understand this already, but this is an agreement we put in place in October of 2020. That's really positive for Cogstate, provides us with enormous upside into the future and provides us with profitable cash flow even at the minimum royalty levels and with substantial upside for those royalties if and when Alzheimer's disease drugs hit the market.
One of the other things that really impacted our business and we've seen this over the last 12 months has been the increased R&D investment in Alzheimer's disease. Obviously that's reflected in these sales numbers, that $82.5 million record sales level really driven 84% of that is in Alzheimer's disease. So with that growth is really driven by investment in Alzheimer's disease in R&D, that's a trend we don't think will stop. Our belief is that we will continue and that we are really at the beginning of a new age of understanding of what is Alzheimer's disease and how it's treated. And I think, as I said before, I think the next 12 months could be really exciting for the industry as a whole.
The final point that I think is really important for investors to understand is that these are substantial change in the way that clinical trials are being operated and being conducted. And so we talk here to the increased adoption, decentralized clinical trials, so this graph just really shows the level of increase – projected 28% increase from 2021, 2022 in terms of trials utilizing virtual or decentralized components. So we're seeing this as a growing trend throughout the industry, just to understand what is a decentralized trial.
A traditional trial is conducted in a research hospital and involves an in-person assessment with a physician and the patient sitting with each other. A decentralized trial focuses more around – much more elements of home-based assessment using telehealth child technologies. From a Cogstate perspective, those home-based assessments really provide an impetus for an increased user digital assessment and obviously Cogstate's technology is really well validated for that remote digital assessment. It means fewer professionals used within a research hospital, which means – from a pharma company point of view means lower training and monitoring costs and better use of scarce resources. That can and does lead to more consistent administration of those assessments because we've got fewer people conducting the assessments, it just means less error and better data.
We've found that those studies are easier and faster recruit, and they have larger geographic reach into the community and a more diverse patient population. And I think really importantly, from a Cogstate point of view, one of the things we are seeing is that those studies have resulted in a greater share of trial budget for Cogstate, where we're seeing a transition from revenue that would otherwise be – and costs would be paid to the research hospitals and much more of that coming to Cogstate as we utilize how network of consulting neuropsychologists to provide some of those services.
So we've found that the push into decentralized trial has managed to place Cogstate at the forefront of trial design, particularly in Alzheimer's disease studies. And I think it's fair to say that we're really leading the market in terms of the conduct of decentralized Alzheimer's trials. I think we've got more experience than any of our competitors in the contact of those trials.
And I think the other really important thing to note is it’s positioned Cogstate as a strategic partner for other technology providers into this pharma services market and we've got examples of that, like the announced Clario partnership where we've enabled our partners to bid on trials in Central Nervous System diseases, where Cogstate is providing that really specific solution that those broader technology-based solutions that are essential for the conduct of the clinical trials, those companies aren't able to provide those special solutions. And so the incorporation of Cogstate technology and Cogstate services as a joint offering is a really important way as to both how Cogstate thinks that we can grow the market share, but also how our partners can grow market share. So to date, that's been a really positive outcome and we see that as a really critical way of how we'll grow both our customer base and revenue going forward.
So just to close out and before we open up to questions, we see our businesses in a really strong position, our clinical trials business is growing, and we continue to see further growth in that business. We see enormous upside from the healthcare side part of the business. I think that the true upside from that only comes after positive data from a Phase III Alzheimer's trial, but we note there's really important data, that's going to be read out over the course of the next year.
We've been able to control our costs and show really good margins in the business through fiscal year 2022. And I think we can control those margins as we push forward into 2023 and beyond and we've seen that revenue and that earnings growth has led to increase in cash. And we expect that from a cash flow perspective will see further growth in 2023 and beyond.
So with that, I'm going to pause there and open up to question. As a reminder, there's two ways you can ask a question, either type it into the panel or raise your hand to have your line unmuted and ask a question.
Thanks so much for the presentation today, Brad, and we've got a bunch of questions coming in already, and thank you to Darren as well. My apologies for missing calling out Darren. So let's go ahead and dive right in. The first question I've got here is how do you view your total available market and whether or not it is growing as pharma companies invest in dementia drugs?
Yes. So really good question in terms of total available market. I mean, in terms of how do we view it. It's interesting one that when you look at the available information, of course, it always tends to be backward looking. So Jeff Cummings and associates puts out a paper each year looking and assessing the state of the Alzheimer's disease, R&D market and looking at that. And if you look at those numbers, you can see it's growing in terms of just number of studies and number of compounds and different focus areas.
From our perspective, we tend to look at the request for proposal that come into us and the different opportunities that we're seeing. And so it's a hard number to wrap your arms around and get a definitive answer in terms of total addressable market. But certainly, it's large and our belief it's growing. And I think probably more pertinent to that is that we believe it will continue to grow especially if you see positive data from one of these upcoming Phase III trials with respect to the Alzheimer's disease market specifically.
The other thing that's, I think really important to note is that, whilst we often talk, especially in these invested forums about Alzheimer's disease, of course, we are running a number of studies across a whole range of different diseases. And so just to pick out a couple that we'll focus on specifically through financial year 2023, we see substantial growth in areas like Parkinson's disease and also in rare diseases. And those are two areas where we have substantial focus where we think we can grow market share over the course of the next year or two and again, areas where we're seeing an increased level of R&D investment.
Thanks for that response, Brad. And our next question is, if a contracted trial is delayed, the understanding is that revenue recognition would also be delayed, but do you still receive the funds per the original schedule in the contract?
So I'll let Darren answer that one.
So basically the funds follows the revenue recognition. So our revenue recognition is largely around completion of milestones or enrollments of patients. So we would expect to see cash follow closely along the lines of revenue recognition. We do take a software license portion upfront where the deal involves software licenses. So any deal that's being delayed that involves software licenses that has most likely been built and recognized upfront, but the ongoing running of the trial on a milestone basis, I would expect that cash would pretty closely follow revenue recognition.
Great. Thanks for that, Darren. The next question we have is how should we think of contract termination risk, for example, Biogen terminated the observatory trial on Aduhelm as it's not getting the Medicare rebate. Are there any material contracts in the backlog that maybe subject to termination risk similarly?
So I think to answer that one, there's always a risk of termination for any company that works in this pharma services space. But look, speaking specifically, we don't – we haven't identified any of our ongoing studies that are at specific risk of termination. We weren’t involved in that Aduhelm study that's been canceled. So that had no impact on our contracted revenue. And we don't see a similar risk that we've identified at present in respect of any of our ongoing studies.
But as I say, there's always a risk, study could be canceled for a range of reasons, anything from issues with respect to the drug or some sort of toxicity issue, change our focus from the pharma company that's running it, some negative data readout or as we saw with respect to the Aduhelm, issues with respect to the financial aspects of the trial itself or the financial forecasting in respect to the revenue from the sale of the drug. So a whole bunch of things that are outside of our control, but no specific risks identified at the moment.
Thanks for that, Brad. The next question we have is the non-Alzheimer's related trial, sales volume was down from financial year 2020 and financial year 2021. Is there any trend noticeable on that front?
Look, I think that's true. The statement is true. Look, I don't think necessarily a trend, I suspect there is anything, there's a little bit of reflection of focus areas. Obviously the substantial growth in Alzheimer's disease has focused a lot of our attention and necessarily, so I suspect there's an element of that. As I said before, we very consciously have a commercial plan for fiscal 2023 that involves some focus outside of Alzheimer's disease, as we seek to grow in a number of different areas and use that as the basis of continued growth of our business. So yes, I can't put that down to anything specific. But yes, just note that obvious thing in respective focus.
Great. Thank you. The next question, how sustainable is the operating leverage that has been seen and the ability to – is there an ability to maintain these strong margins going forward or even improve on them?
So good question. I'll make a couple of introductory remarks and let Darren handle this. Just as an opening statement, I think that – so we opened our initial guidance respective fiscal 2022 that was – that we have EBIT margins in the range of 20% to 24% of revenue. I think as we look forward, I think that's a statement that we would continue to be comfortable with on a business as usual basis. That 20% to 24% EBIT margin is appropriate. Darren, do you want to talk to some of the specifics that come into the result for 2023, which is obviously at the upper end of that guidance – with respect to fiscal 2022, which is at the upper end of that guidance.
Yes. Thanks, Brad. So fiscal 2022, we certainly had a couple of benefits. We had a much higher software license mix in our clinical trials revenue than we'd historically seen. So historically, it's been in the range of sort of 18%, 19% of revenue for FY2023. It's looking more like 23%, 24% of revenue. So that’s certainly provides an increase in margins. As the clinical trials business continues to grow, we do see operating leverage in the sense that roughly 25% of the cost base relates to what we would call SG&A or selling, general and admin, which is essentially our sales proposals, business development, marketing team and we don't need to grow that at the same rate that the business grows. So that's the second point of operating leverage.
And then the third one where we've seen substantial improvement in FY2023 is our operating expense. When we look at that as a percentage of revenue, I can see in the guidance, it declined to 30% to 31% down from around 30% in the prior year. Certainly for future revenue growth, there is some scope for operating leverage improvement on that operating expense [EUR]. But I think at this kind of revenue base, where we're fairly optimized on operating expense at the moment. So it really depends on the future growth on the business as to how much continued future leverage there is on operating expense. But the combination of those kind of three elements is what drives our EBIT margin. And I think as Brad said, that kind of guidance of 20% to 24% is something that we feel fairly comfortable with.
Sorry, Darren, to interrupt. The only thing I'd add in there is as we look forward, as we talk about those 20% to 24% EBIT margin, we are really focusing on business as usual. So the current revenue mix between clinical trials and healthcare, and noting Darren's comments with respect to license fees in clinical trials and how that can change our margins in that part of the business.
Certainly, if we see positive data from our Phase III Alzheimer's trial, we see drug on market readily available. And if Cogstate and Eisai can be successful with respect to the launch of our technology and that healthcare part of the business, that would lend itself to improved margins. So within that healthcare part of the business, much more of a software sale as compared to clinical trials, which is a software and services sale, so much higher potential margins in that healthcare business, which is already operating at the sort of at high margins, 75% plus margins based on the minimum revenues that we're receiving from Eisai. Once revenues start to exceed those minimums, we would expect those margins to increase even higher and a lot of that to drop the bottom line.
So I think the ability to grow beyond that 24% EBIT margin really comes from that change in revenue mix. And if we see a much greater increase in revenue from that healthcare part of the business, which is software sales, we would see that those EBIT margins improve even further at that stage.
Darren and Brad, thank you so much. That was really helpful to have you layout those different elements. And taking a different question here and just noting to the audience, we've had a lot of great questions and we won't be able to get to all of them, but we're going to take another about two to three more from our current list. And the next one is what is the latest thinking with respect to the use of free cash flow?
Yes. Good question. So look, I think as an opening statement, I'd suggest that its – if you look at the broader economic environment, it’s a great time to have a strongly cash flow positive business and good cash on hand given the pullback we've seen and the valuation of the business, I'm very pleased that we don't have to go to our shareholders to raise funds at the moment and that we have a good cash flow positive business.
So $30 million or thereabouts of cash at June 2022, we expect to grow cash again through the June 2023 year. Look, we are looking at – and on the lookout for, I should say opportunities with respect to technology that we could add, particularly in our clinical trials business. So if we could find opportunities which increased those license fee type revenues that Darren was talking about before in our clinical trials business, which further improved our margins, certainly we are really interested in that. It's a matter of finding the right opportunities. So things that we can find where we can say that we can, that's complimentary to our existing offering that can help us increase market share and increase, I suppose, average contract value with increased license fees and to do that in a way that doesn't add too significantly to our cost base, those are sort of the parameters we're looking at and still very much on the lookout for those kind of opportunities.
Without – as we project forward, say to this time next year in the absence of those kind of opportunities, we're going to find ourself with a very large cash balance, and we will need to think about what we're going to do with that and whether it makes sense to return some of that to shareholders. But I think at the moment, the thinking is that we continue to look for opportunities, where we are very pleased that we have that substantial cash balance and a cash flow positive business. And we'll continue to think about the best way to put that to use.
Great, Brad. Yes, great result there. And we're going to take this final question for the morning. Can you briefly discuss your sales focus for the next year?
Yes. So look, sales focus for next year is really – certainly increased market share in Alzheimer's disease. And then as I mentioned before, those are the two areas in – of particular focus around Parkinson's disease and rare disease. So across those three broad indication groups, we're going to have a significant focus. In terms of how do we do that, how do we grow market share or how do we grow our customer base, two key areas there, I mean, and these are in these key areas in addition, of course, to the continued focus we have around the scientific evidence that supports our technology and supports our offering generally. But that is certainly through our sales channels.
So the channel partners, we've been publicly announced our partnership with Clario, which is progressing really well. We've had certainly some substantial sales success through the March, and particularly the March quarter and we've seen already that's led to increased activity from their sales and business development team. So a lot of focus on both that existing channel partnership, but also growing our channel partnership base. I note that we've got a number of opportunities with other channel partners that we are pursuing currently. So we will seek to improve our offering in that regards where we want to be easier to partner with. So that means some improved technology solutions in terms of better ways of integrating our technology into those partners.
And then I think the other thing where we see significant growth opportunity is the increased adoption of decentralized trials and our offering there and the way in which we go about supporting those and more of those at home assessment, we think we are uniquely placed to be able to help pharma companies to run really robust at home assessments because of our – both our computerized offering, but also because of the availability of a really strong network or international network of consulting neuropsychologists that help us to deliver telehealth style assessments, as well as their own computerized assessment, and that unique offering I think positions it really well, with respect to adoption in that decentralized environment. So that channel partnerships and the decentralized trials are really key focus areas for us as we seek to grow market share and grow both our sales and then subsequently our revenue.
Brad, thank you so much for outlining those details. It's really helpful to know. And with that folks, we're going to go ahead and wrap up the Q&A section of this webcast and give Brad and Darren the opportunity to say any final words to us or audience. So first, I'll hand it over to Darren. Any final words?
Thanks, Ruth. Look, we are just really pleased with the performance for financial year 2022, and feel very positive about the business fundamentals heading into financial year 2023 and beyond. You've got some challenges with some clinical trial delays, which hopefully will get sorted out in the coming short period of time and recover back into FY2023, and then I feel we are in a very strong position for FY2024 and 2025 as the chart showed in terms of the backlog revenue there and continuing to work our relationship with Eisai. So I feel very positive about the business fundamentals as we head into the new financial year.
And I’d just echo Darren's comments and really, again, identify those upcoming catalysts in terms of the data readout from those Phase III Alzheimer's trials that – if successful, we will really position us really well for accelerated growth into particularly the second half of fiscal 2023, and then into 2024 and 2025, where as Darren noted, we're already really well positioned. So I think the business is in really strong position. Fundamentals are really strong and look forward to updating everyone again in a month's time when we get through our audited financial results. Thank you so much for your time and we look forward to speaking to you again soon.
Thanks, Brad. Thanks all.