CASE STUDY: Cogstate (COGZF)
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February 13, 2022
Cogstate Ltd. (COGZF) makes computerized cognition tests that are used in Australia and internationally. These tests so far have been chiefly used as endpoints or inclusion criteria in clinical trials that involve cognition (Alzheimer's, schizophrenia, etc.). See here for demonstrations of their various tests: https://www.cogstate.com/clinical-trials/computerized-cognitive-assessment/
The greatest opportunity for Cogstate is for its tests to be used as screening tests for Alzheimer's. But this won't happen until an effective treatment for Alzheimer's is developed. In the meantime, there is a large opportunity for Cogstate's tests to be increasingly used in clinical trials that involve cognition.
A clinical trial for an Alzheimer's drug can cost $1 billion. Cogstate's tests usually cost less than $10 million per trial. Pharmaceuticals are more than willing to pay $10 million for a high-quality and proven cognitive test. Pharmaceuticals are not willing to try an unproven cognitive test.
I assume 45% growth in revenues in 2022 and 25% growth in revenues in each of the following years: 2023, 2024, 2025, 2026, and 2027. That makes revenues in 2027 equal to $148.8 million.
I assume EBITDA margin of 35% in 2027. We get the following estimates for 2027: $52.1 million EBITDA, $36.5 million cash flow, and $37.2 million net income.
Using these figures, we get the following multiples:
- EV/EBITDA = 4.04
- P/E = 6.24
- P/B = 1.80
- P/CF = 6.37
- P/S = 1.56
Cogstate has a Piotroski F_Score of 7, which is good.
Insider ownership is over 38%, which is excellent. This includes Martyn Myer, who founded Cogstate in the 1990s and owns 13.7%. It also includes David Dolby, who owns 15.1%. David's father Ray Dolby founded Dolby Laboratories and suffered from Alzheimer's late in his life. Eisai Co., Ltd., owns 6.8%. And the CEO Brad O'Connor owns 3%.
Net debt is very low: Cash is $23.6 million, while debt is $1.7 million. TL/TA is 54%, which is good.
Intrinsic value scenarios:
- Low case: Revenue in 2027 may reach $60 million and net income $12 million. At a P/E of 15, the stock would be worth $1.04, which is 22% lower than today's $1.34.
- Mid case: Revenue in 2027 could reach $148.8 million and net income $37.2 million. At a P/E of 20, the stock would be worth $4.29, which is 220% higher than today's $1.34. The CAGR in the stock price would be 26.2%.
- High case: Revenue in 2027 could reach $190 million and net income $47.5 million. At a P/E of 25, the stock would be worth $6.85, which is over 410% higher than today's $1.34. The CAGR in the stock price would be 38.6%.
- Very high case: Cogstate's tests could be used globally as screening tests for Alzheimer's. Revenue in 2027 could reach $400 million and net income $100 million. At a P/E of 25, the stock would be worth $14.42, which is over 975% higher than today's $1.34. The CAGR in the stock price would be 60.8%.
Risks
The biggest risk is competition. But the largest competitor to Cogstate's tests is the CANTAB offering from Cambridge Cognition. This product does much less in sales.
Also, this is not a winner-take-all industry. Most Alzheimer's clinical trials use over a dozen cognitive tests as inclusion criteria or endpoints. Cogstate doesn't have to steal share to win because pharmaceuticals are happy to add another validated test to their trials.
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Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.
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